Consolidating Student Loan Debt With A Private Loan
How to Consolidate Student Loans
Do you feel weighed down by student loan debt? If so, you might consider consolidating or refinancing your loans to lower your monthly payments. In many cases, that can be a smart financial move. But before deciding to consolidate or refinance, it pays to take a close look at the pros and cons.
Highlights
- Consolidating, or refinancing, high-interest private student loans into a single loan with another private lender can lower your monthly payments.
- If you have federal student loans, another option may be to consolidate them through the government's Direct Loan Program.
- If you consolidate federal loans into a private loan, you will lose some of the special benefits that federal loans have to offer.
How Does Student Loan Consolidation Work?
There are two basic ways to consolidate your student loans. You can do so through a private lender or the federal government. Only federal loans are eligible for federal consolidation.
In the case of a private student loan consolidation (often referred to as refinancing), a private lender, such as a bank, pays off your private or federal student loans. It then issues you a new loan at a new rate and with a new repayment schedule. Refinancing makes the most sense if you have high-interest private loans and can obtain a significantly lower rate or better terms with the new loan.
However, with federal student loans, you have another option, which is to combine them into a new direct consolidation loan, through the Federal Direct Loan Program. Your new interest rate will be the weighted average of your previous loans, and you will remain eligible for some of the special features of federal loans.
While you can't consolidate private loans into a federal loan, if you have both private and federal loans, you can consolidate the private ones with a private lender and the federal ones through the government program.
If your student loan is still within its grace period, wait until that ends before you refinance it.
Understanding student loan consolidation
Are you tired of making multiple student loan payments each and every month? At LendingTree, we understand it can be difficult and time-consuming to keep track of all your different student loan payments. A student loan consolidation can help by combining all of your loans into a single loan with one interest rate and one monthly payment.
Both federal and private student loans can be consolidated in order to make your loans less complicated and more convenient. Parents can consolidate loans taken on the student’s behalf, but they cannot consolidate with the student into a single consolidation loan. To determine if consolidation is right for you estimate your savings with our student loan consolidation calculator.
Federal student loan consolidation
What is federal loan consolidation?
If you have multiple student loans from the federal government, then it’s likely you make multiple payments to various lenders. The result is more payments to keep track of and it’s easier to forget a payment. A Direct Consolidation Loan allows you to consolidate your student loans into a single loan, with a single monthly payment.
Interest rates and terms
The interest rate on your federal consolidated student loan is fixed. Like a fixed rate mortgage, this means your interest rate stays the same, keeping your monthly payment amount consistent. The loan term will be 30 years, which is likely to reduce your monthly payment amount by stretching out the loan term.
Should I consolidate my federal student loans?
If you want a lower monthly loan payment, consolidating your student loans will likely do that for you. If you have difficulty keeping track of all your student loans, and as a consequence, find yourself missing payments, consolidation will simply all that.
However, if you’re concerned about the impact on your borrower benefits, consider reevaluating your budget and determine how you can continue to make your existing payments. Deferment or forbearance are always options for short-term relief from payment difficulties. There are also a few refinancing options you may consider.
Federal student loan consolidation pros and cons
Benefits of Consolidating Federal Student Loans
The interest rate you pay will be the weighted average of the interest rates on all your loans being consolidated, rounded up to the nearest 1/8 of a percent. Therefore, if you have some loans with a significantly higher interest rate, it could be beneficial to consolidate.
Other benefits of federal student loan consolidation may include:
- Lower monthly payment
- Simplified loan repayment
- 30-year repayment
- Access to alternate payment plans
- Ability to switch loans with a variable interest rate to a fixed interest rate
Drawbacks of Federal Consolidation
Potential loss of borrower benefits is the primary drawback of consolidating your federal student loans, this being the number one concern for most students.
Other drawbacks include paying more interest. Because you’re stretching your payments out over 30 years, the amount of interest you pay over the life of the loan will be greater, even though your monthly payment may be less.
Borrower benefits that could be lost include:
- Loss of interest rate discounts
- Loss of principal rebates
- Loss of loan cancellation benefits
Private student loan consolidation
What is private student loan consolidation?
Like your federal student loans, private student loans may be consolidated into a single monthly payment. This is done through a private lender such as a bank or credit union.
Interest rates and terms
Unlike federal loan consolidation, private student loans often come with a variable interest rate when consolidated. This means your monthly payments will fluctuate as interest rates go up or down. Private student loans can usually be paid off over a 10-25 year term.
Benefits of consolidating student loans privately
Based on your creditworthiness, lenders may offer you a reduced interest rate on your consolidated private loans. This can save you money over the life of the loan. Having a single monthly payment also makes it easier to keep track of your payments.
Drawbacks of private loan consolidation
Private student loans often come with a variable interest rate, meaning your monthly payment amount can change.
When to consider private student loan consolidation
If you can get a better deal on your interest rate, then consolidating student loans will likely save you money over the life of the loan. Since interest rates are often dependent on a borrower’s credit score, private consolidation may be something to consider if your current credit score is higher than when you initially took out your student loan.
Can you consolidate federal and private loans together?
When we’re talking about a Direct Consolidation Loan, the answer is no. However, there are some options for refinancing or consolidating your federal and private student loans. These are private lenders who will consolidate all your loans. If this is something you’re interested in, LendingTree can connect you with a lender to refinance your student loans. But be aware–once you do so, you’ll lose your borrower benefits on your federal student loans. These may include repayment options, like income-based repayment, as well as student loan forgiveness options.
How to consolidate federal loans
Log in to studentloans.gov and click on “Complete Consolidation Loan Application and Promissory Note.” You’ll need to finish the application in one session, so gather the documents listed in the “What do I need?” section before you start and set aside about 30 minutes to fill it out.
- 1. Enter which loans you do — and do not — want to consolidate.
- 2. Choose a repayment plan. You can either get a repayment timeline based on your loan balance or pick one that ties payments to income. If you pick an income-driven plan, you’ll fill out an Income-Driven Repayment Plan Request form next.
- 3. Read the terms before submitting the form online. Continue making student loan payments as usual until your servicer confirms consolidation is complete.
If your loans are in default, consolidation is one of a few methods to get your loans back on track. To consolidate defaulted loans you'll need to make three full, on-time consecutive monthly payments on the defaulted loan and agree to enroll in an income-driven repayment plan.
How to use income-driven repayment plans
If you’re considering either federal or private student loan consolidation in order to get a drastically lower loan bill, look further into income-driven repayment instead.
The government offers plans that cut payments to 10% or 15% of “discretionary” income and offer forgiveness on the remaining balance after 20 or 25 years. You can sign up for free on studentloans.gov.
If you have a large loan balance and a low income, income-driven repayment is probably your best option for the lowest monthly bill.
Student loan debt relief alternatives
There are five main options for student loan debt relief. These options include loan consolidation through a private lender or the federal student loan consolidation program, student loan refinancing through private lenders, deferment or forbearance of loans for financial hardship, and loans that are forgiven, canceled, or discharged. There are also seven different education loan repayment plans, which are based on the borrower’s personal financial circumstances.
Make sure you carefully research all your options, and weigh the pros and cons before taking action. Generally, these alternatives are better than defaulting on your student loans.
Advantages and Disadvantages of Student Loan Consolidation
Here's a look at the major pros and cons of both private and federal loan consolidations.
Pros
Lower Monthly Payments
Private loan consolidation can help reduce your monthly loan payments by offering you a lower interest rate. This means lower payments overall and saving money over the life of the loan. Many graduates also find that they can get better interest rates because their credit scores improve over time.
Another way that a private consolidation or refinancing can cut your monthly payments is by extending the length of your loan. For example, if you refinance a 10-year student loan into a 20-year loan, you will see a dramatic cut in your monthly payments. But signing up for a longer loan also comes with a big caveat, as we explain a little later on.
You may be able to reduce the monthly payments by consolidating your federal loan if you qualify for one of the government's income-based repayment plans. These plans set your monthly payments according to how much you earn or how much you can afford to pay.
Fewer Monthly Payments
Keeping track of multiple student loan payments, on top of all your other bills, can be a hassle. Consolidating your student loan debt can help you reduce your bills to just one (or two, if you consolidate your private and federal loans separately, as is advisable).
Many private lenders even offer a slightly lower interest rate if you enroll in an automatic payment plan. This option saves you a small amount of money each month, and it helps you to avoid ever forgetting a payment.
Flexible Repayment Terms
When you consolidate your loans with a private lender, you can choose how long you want the loan to last and whether it carries a fixed or variable rate. Choosing a variable rate can be riskier since rates can go up anytime, but it can also get you a lower interest rate at the start of the loan. Federal consolidation loans carry a fixed interest rate.
Releasing a Cosigner
Another benefit of refinancing your private loans is that you might be eligible to sign for the loan on your own. Dropping a cosigner, who is typically a parent or another close family member, not only gets them off the hook for your debt, but it may raise their credit score and allow them to access new lines of credit if they need to. Federal loans don't typically involve cosigners.
Cons
You Could Pay More in the Long Run
While a longer-term loan can mean lower monthly payments, you could end up paying tens of thousands of dollars more over the life of the loan because of the accruing interest.
You Could Lose a Federal Loan's Advantages
If you consolidate a federal student loan with a private lender, you'll lose the option to sign up for an income-based repayment plan. You'll also no longer be eligible for federal loan forgiveness and cancellation programs. These are major reasons to consolidate your federal loans only through the federal program.
Any Existing Grace Periods May Go Away
As soon as you take out a refinanced loan with a private lender, you must start repaying it. With many student loans, you can delay payments while you are still in school or if you have entered a graduate program. If your current loan is still within its grace period, wait until that period ends before starting the refinancing process.
How to Consolidate Student Loans
You can consolidate your student loans through many financial institutions, including your local bank or credit union, in addition to lenders that specialize in these types of loans. Among the well-known names in the field are Earnest, LendKey, and SoFi.
You can find more information about the steps for consolidating your federal loans on the Department of Education's Federal Student Aid website.
Is It Smart to Consolidate Your Student Loans?
Yes, it can be a smart move to consolidate your student loans if you have loans from multiple service providers. Consolidation allows you to have one loan with one monthly payment, which is easier to manage. Consolidation may also result in a lower interest payment. Another benefit that consolidation could provide is by giving you a longer time frame in which to pay back your loans, thereby reducing your monthly payment. This may increase the total interest you pay on your loan, however.
Does Student Loan Consolidation Hurt Your Credit?
Federal student loan consolidation does not hurt your credit because there is no credit check with federal consolidation. If you consolidate your loans via a private lender, then there may be a temporary drop in your credit score because the lender will do a hard check on your credit; however, your credit may also then benefit from consolidation if you end up with a lower interest rate and lower monthly payments.
What Student Loans Cannot Be Consolidated?
Private student loans cannot be consolidated. Direct PLUS loans, which are loans that parents take out to pay for their children's education also cannot be consolidated with the other student loans that are in the child's name.
The Bottom Line
Consolidating your multiple student loans can be an easier way to manage the debt that you owe. It may also lead to lower interest rates. If you feel that the costs and keeping up with your student loans has become difficult, looking into consolidating them may ease your burden. Before doing so, it's worth looking at the pros and cons of consolidating.