In order to help with the numerous problems that student debt causes, the government offers several programs designed to lighten the load and make paying back student loans less stressful. One such option that can be very helpful in some cases is student loan consolidation.
Student loan consolidation can have a number of benefits, not least of which is simplifying overly complex loans and repayment plans. It can also help reduce an individual’s monthly payment amounts by extending the total loan period and enable the person to qualify for additional protections and payment plan benefits.
However, it is not something that you should do without thoroughly researching the subject and taking a serious look at your own finances. Once student loans have been consolidated, it cannot be undone. There are also some big differences between federal and private student loan consolidation, and the right option for you will depend upon several individual factors.
What is student loan consolidation?
Student loan consolidation is a program provided by the Department of Education. When you get a Direct Consolidation Loan, you are essentially combining multiple current student loans into one loan. The federal government will pay all of the loans that you wish to consolidate and then allow you to make one monthly payment to them each month.
What is the difference between federal and private student loan consolidation?
Private student loan consolidation– also known as student loan refinancing– is similar, but the loan comes from a private institution instead of the Department of Education. Private loan consolidation has its benefits, including a reduced interest rates, but it causes the individual to lose out on any federal benefits or protections that come with student loans.
Private student loan refinancing will also have different qualifications than federal consolidation, and not everyone can qualify. For instance, if you go to Wells Fargo or Chase for student loan consolidation, you could be denied based on your credit score, income or other financial factors.
What are the benefits of student loan consolidation?
The most obvious benefit of consolidation is the simplicity that comes from only having to make one loan payment. Since all Direct Consolidation Loans are fixed-rate loans, it will also lock in one interest rate for the total amount of your debt through the entire life of the loan.
The length of your loan will depend upon your individual needs, but it is usually between 10 to 30 years. Stretching the loan out over a longer period can also mean lower monthly payments. Consolidation will also help you qualify for many new benefits such as Public Service Loan Forgiveness and additional income-based payment plans.
What are the drawbacks of student loan consolidation?
While extending the overall period of your loan can lower your monthly payments, it can also mean that you end up paying more in interest in the long run. Also, the interest rate for your Direct Consolidation Loan will be the weighted average of the combined loans rounded up to the nearest one-eighth percent, and this can lead to a slightly higher interest rate.
For instance, if the weighted average of your current loans is 5.15%, the rate for your new consolidated loan will be 5.25%. Additionally, any unpaid interest on your current loans will be added to the principal of the new loan, so you will end up paying interest on the interest. You may also lose out on certain repayment plans and any progress you have already made towards loan forgiveness.
How do I consolidate my student loans?
While you should seriously assess your individual finances and student debt before making the decision to consolidate, the process itself is quite simple. If you have decided it is right for you, you should be able to complete the entire process on the Department of Education website in under an hour.