How Does Student Loan Consolidation Work?
Much like refinancing traditional loans, student loan consolidation lets you repackage your outstanding debt into a single loan that you pay off every month. There are several benefits to this, with the main one being that you can more easily plan your budget if you’re only making one payment.
However, student loan consolidation rates are not always lower. Instead, they’re calculated based on your existing rates.
Before you sign on a consolidation loan, however, it’s worth learning a little more about how they work and what your options are.
Federal Student Loan Consolidation
Federal student loans can be consolidated through the government itself, which offers various programs for students and graduates alike. This process doesn’t lower your interest rate—your new rate is calculated based on the average of interests from your existing loans.
To apply for federal student loan consolidation, you must:
- Decide which loans you do want to consolidate.
- Choose the repayment plan that best fits your budget and income, or one based on your loan balance repayment timeline.
- Read the fine print to fully comprehend what your new loan entails.
Private Student Loan Consolidation (Refinancing)
If you have both private and federal student loans, you can still bundle them into a single loan, although you’ll have to give up the benefits attached to your federal debt.
Private student loan refinancing works by repaying your existing debt through a new private loan, which you then pay directly to the institution that extended it.
To apply for private student loan refinancing:
- Check your credit score and make sure you can improve your current terms.
- Choose which loans you want to consolidate and if you want to include federal loans.
- Compare lender options and find ones that offer the most favorable rates.
- Read the fine print and understand the fees and terms attached to your new loan.
- Make steady monthly payments.
>> For more information about private student loans refinancing click here
Why Should you Consolidate your Student Loans?
There are several benefits to consolidating your federal student loans, as well as factors you should consider when making your decision. It’s worth understanding the drawbacks as well when deciding:
- You can manage your debt more easily when you’re making a single payment instead of two or five.
- You can choose the loan servicer you prefer for your federal loan, so you can work with student loan consolidation companies you trust.
- There’s a chance you could reduce your monthly payment if you opt for a longer repayment term.
- If your finances right now aren’t where you want them to be, consolidation lets you extend your repayment term to give you some breathing room
- They can help you remain eligible and apply for loan forgiveness and loan repayment programs down the line.
- Although you may improve your monthly payments and repayment terms, student loan consolidation rates aren’t lower. Instead, they are the weighted average of the interest rates from your existing loans.
- Longer repayment terms lower monthly payments, but they mean you might pay more in interest over your loan’s lifetime.
- If you refinance your loans, you’ll lose access to any federal benefits to which you may have been entitled.
- You can only apply for federal loan consolidation once, so you will be locked with whatever terms you’re given.
Applying for a Consolidation Loan, Step by Step
Depending on what type of consolidation (federal or private) you’re seeking, you’ll have to complete a few small steps to apply for your new loan.
However, there are some things you should be generally aware of in either case.
- Examine your finances
- Compare the options
- Debt to consolidate
- Agree and Pay
Examine your finances
Before choosing federal or private consolidation (or refinancing), it’s important to know whether your financial status would help you improve your current terms. Private lenders who offer consolidation look at a few factors, including your credit score and your debt-to-income ratio (how much of your monthly income goes to paying off debt).
The former should be at a minimum of 650 but should ideally be above 700. Your debt-to-income should never be higher than 40%.
Compare your options
Depending on your finances and credit, you may be better off with a federal consolidation loan, which won’t lower your interest but may alleviate some financial strain in the short term.
On the other hand, if your finances are in a good place, you may benefit from finding lower interest rates and better terms with private loan refinancing.
Choose which debt you want to consolidate
There may be a situation where you may benefit from not consolidating all your loans. For instance, if you’ve taken out a federal loan but don’t want to lose the benefit of possible loan forgiveness or repayment plans, it may be worth to exclude.
Similarly, a higher interest federal loan may affect the rate you receive for your consolidation loan.
Begin the application process
Either way, you choose, you can complete your application (or at least start the process) online. You can apply for Federal student loan consolidation through the government’s StudentLoans.gov portal.
If you’re applying for a private loan, you can usually do so directly from their websites.
Agree to your new terms, and start paying
Finally, once you’re approved, you’ll have a chance to review your terms before signing on the dotted line. Make sure to read the fine print and understand what each option means (especially when it comes to fees and late penalties, as well as hardship assistance).
Then, make sure to keep up consistently with your loan payments.
If you’ve taken out Federal student loans, you are eligible for several repayment programs funded and backed by the government.
These plans offer different ways to repay your loan in a more sustainable fashion (such as tying your repayment to a fixed percentage of your monthly income, slowly scaling your monthly payments, and more), but are only available as long as you’re still paying your loans to the Federal government.
Choosing Federal loan consolidation can help you further by letting you set up one of these repayment plans and have a more manageable monthly payment.
What are Joint Consolidation Loans?
If you’re married, you and your spouse’s finances become tied together, so it would make sense to consolidate your debt as well. Unfortunately, the US government does not offer a program for joint student loan consolidation.
The US Department of Education did, from 1993 to 2006, but the option is no longer available for federal student loans. Even so, you can still find joint consolidation loans, though you’ll have to go the private route.
Spousal student loan consolidation lets you combine your existing debt and consolidate it into a single loan with both your spouse’s and your name on it. It’s worth remembering that while you can refinance your federal loans this way, you’ll still lose the benefits tied to them.
If both you and your spouse have strong finances and high credit scores, this may be a great way to continue trimming down your family’s debt.
Moreover, if you or your spouse have existing loans with high-interest rates, it may be worth it to reduce your long-term financial hit.
Still, it’s worth remembering that even if you and your spouse separate, you’ll both still be responsible for the loan.