What You Need To Know Before Consolidating Federal AND Private Student Loans
Once you’ve graduated and things start to settle down from the after- graduation excitement, the student loan letters start to trickle in.
You might think: “How many lenders do I have?”
Or “Is this seriously how much I owe?”
And “How will I ever afford these payments?!”
It’s a frustrating experience to have so many lenders vying for your money. Even our CEO had 16 different student loans serviced by four different providers when he graduated.
So how can you keep your head on straight when there are various due dates, interest rates, and lenders? And what can you do if the monthly payments are too high to manage? Don’t fret. You have options.
One option: consolidate your student loans. In this post, you’ll learn more about student loan consolidation, how to consolidate student loans, and if it is right for you.
What is Student Loan Consolidation?
Student loan consolidation gives you the option to combine all of your loans into one new loan. So instead of multiple student loan payments (one for each of your loans), you’d make one single payment every month to one lender.
This new loan maintains the same average interest rate across all of your loans (more on this below).
For students who feel buried in bureaucracy over student loan repayment and managing various lenders and due dates, student loan consolidation may be a good fit for you.
How to Consolidate Federal Student Loans
If you have federal student loans, you can consolidate your student loans with a Direct Consolidation Loan.
You have the option to consolidate your Direct Subsidized and Unsubsidized loans, Subsidized and Unsubsidized Stafford Loans, PLUS loans and more.
You cannot use a Direct Consolidation Loan to consolidate private student loans. However, there are other options for private student loans, which I’ll talk about below.
“A Direct Consolidation Loan has a fixed interest rate for the life of the loan. The fixed rate is based on the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth of 1%. There is no cap on the interest rate of a Direct Consolidation Loan.”
To be eligible for a Direct Consolidation Loan, you need to have at least one Direct Loan or FFEL Program loan that is currently in a grace period or repayment.
It is also possible to consolidate a defaulted loan, under various circumstances:
- You make sufficient repayment arrangements with your current loan servicer before consolidating your loan.
- You agree to repay your Direct Consolidation Loan using the Pay As You Earn, Income Based Repayment, or Income-Contingent repayment plans.
Applying for a Direct Consolidation Loan is a lot like applying for another student loan. After all, you are applying for a loan, to pay off all your other loans, in order to manage one loan, with one payment .
If you want to get started with consolidating your federal student loans:
- Go to StudentLoans.gov and apply for a Direct Consolidation Loan. You will need your Federal Student Aid ID to apply. The application is free!
- Choose your loans as well as your loan servicer.
- Choose a Repayment Plan.
- Review the Terms and Conditions of the loan, review your information, and sign your application.
- Submit your application electronically or via snail mail. Once your loan has been approved, your consolidation servicer will be in touch with you about next steps.
It’s crucial that you continue to make payments on your loans, until the new consolidation loan comes through. Once it does, your loans will be paid off, and you will have one new loan, with one new payment, and one fixed interest rate.
It’s important to note that through consolidation you have the option to extend your repayment period, which means you’ll be paying a lot more in interest over time. So on one hand, you have smaller payments that are more manageable, but on the other hand, you will be paying more for that luxury
over time in additional interest.
How to Consolidate Private Student Loans
But what if you have private student loans? If you only have private student loans then the process of consolidating your loans is a bit different. But there are options for you too.
Many private student loan lenders are able to refinance and consolidate private student loans. While the goal of consolidating federal student loans is to simplify loan repayment, the primary goal of refinancing private student loans is to decrease interest rates and save money.
Having private student loans with variable interest rates can be tough — some lenders have exorbitant interest rates that can really eat at your progress during repayment. Because of that, consolidating and refinancing through a private lender can be an attractive option.
Luckily, there are several options to consider — some offering variable rates as low as 1.90%! The majority of the student loan refinancing companies offer both variable and fixed rates, as well as flexible repayment terms between 5 and 20 years.
If you want to consolidate your private student loans:
- Do your research on the various refinancing lenders. These are private companies that can often provide a better interest rate for those with private student loans.
- Read over the eligibility requirements. Each lender has different requirements, but generally they want you to have good credit, steady employment, and a favorable debt-to-income ratio .
- Apply for a loan that includes the refinancing terms that you desire.
Consolidating your private student loans through one of these private refinancing companies can be a great way to minimize your payments and lower your interest rates.
Consolidating Federal and Private Student Loans Together
If you have both federal and private student loans and are looking to consolidate your loans, you cannot consolidate through a Direct Consolidation Loan (as I mentioned above).
If you are looking to consolidate both your federal and private student loans into one loan. refinancing through a private company is your go-to option.
Through refinancing, you are essentially consolidating your loans AND (hopefully) getting a better interest rate. Refinancing and consolidating your loans can potentially save you thousands of dollars in interest, but with one big caveat.
Refinancing and consolidating your loans through a private lender — and not the federal government — means you are taking out another private loan. This means you’re no longer eligible for any of the federal student loan repayment options and protections that can help you out during tough times.
So while Income-Based Repayment and loan forgiveness may not be an option for those looking to refinance and consolidate their federal and private student loans together into one loan, many refinancing companies do have programs that allow you to pause your payments if you become unemployed. If you only have private student loans, then this is less of an issue.
If you are curious how to consolidate and refinance your federal and private student loans, check out the best companies for student loan refinancing and follow the steps above.
Is Consolidation Right For Me?
If you are wondering how to consolidate student loans, you may be thinking: “Is consolidation right for me?”
Whether you have federal student loans, private student loans, or both, consolidation may be a good fit for you if you need to change up your repayment plan. You just need to choose the best option based on your needs and the types of loans you have.
Through both a Direct Consolidation Loan and through a private student loan lending company, you can ease the burden of balancing numerous due dates and lenders.
A Direct Consolidation Loan can lower your payments (when used in conjunction with federal student loan repayment options), but can result in paying more in interest over time.
By consolidating and refinancing with a private lending, you could lower your monthly payments or potentially save money with a lower interest rates (or maybe even both).
Just make sure that you look at the big picture and know how consolidation will affect how much you pay towards your student loans in the long run.