Long-term student loan payments are a reality for many college graduates. Whether you just graduated or have been out of school for more than a decade, the benefits of consolidating your student loans are worth considering.
Student loan consolidation allows you to combine multiple loan payments into one simple payment. It can reduce your monthly payment and even lower the overall amount you spend repaying your loan.
While consolidating federal loans into a private loan has some disadvantages, it is up to you to balance the benefits of private loan consolidation with the disadvantages of losing federal loan benefits. There is a lot to learn about consolidating your student loans, from releasing a cosigner to comparing loans from multiple companies.
How Student Loan Consolidation Works
You can consolidate student loans through private companies or the federal government. The government or the private company pay for your outstanding loans and then give you one consolidated loan in return.
Private consolidation combines multiple loans into one or transfers a federal student loan into a private consolidation loan. You can consolidate federal and private loans into a new private loan. Private consolidation is sometimes called refinancing, but they are different processes.
What is refinancing?
Refinancing is a part of consolidating, but it can also be done separately from the consolidation process. You are refinancing when you change your interest rate and loan term with a new loan. One of the advantages of consolidating your loans with a private company is that you can refinance whenever possible.
You can only consolidate federal loans and not private loans with federal loan consolidation. Your new loan interest rate will be the average of your past loan interest rates. You may still qualify for some federal loan programs.
How Student Loan Consolidation Can Help You
There are many ways student loan consolidation can help you. Primary benefits include simplified payments, lower monthly payments, added flexibility to a payment plan, and cosigner release.
Some benefits specific to private loan consolidation include the ability to refinance at any time and earn lowered interest rates. Federal loan consolidation also has benefits related to federal loan programs.
Both federal and private consolidations have the advantage of simplifying monthly payments. If you have multiple student loans, you have to keep track of multiple payments every month.
When you consolidate a loan, a private company or the federal government pays off your multiple loans and gives you one loan in return. After consolidation, you will have a single loan payment each month instead of multiple.
Lower monthly payments
Federal and private consolidation can both lower your monthly payment by increasing your loan’s term length. If you had a 20-year time frame to pay off your loan and consolidate to a 30-year term, your monthly payment decreases significantly.
While increasing your term reduces your monthly payment, it also increases how much you spend on interest payments over the life of your loan. For instance, a borrower pays $12,727 for a 10-year $10,000 loan with an interest rate of 5%. Their monthly payment for that loan is $106. If that person refinanced to a 20-year loan with the same interest rate of 5%, the borrower would pay $15,838 over the life of the loan. Their new monthly payment would drop to $66 a month.
Consolidating your loan for lower monthly payments is beneficial if you need to use the saved money for living essentials. On the other hand, if you do not need the potential savings, you will save money by avoiding term increases.
Federal loans do not offer as many options as private student loan consolidations. If you refinance with a new federal loan, you can choose a longer loan term, but the interest rate is determined for you.
The federal process takes a weighted average of your former loans’ interest rates to calculate your new loan’s fixed interest rate. This method means if you had a $20,000 loan with a 6% interest rate and a $10,000 loan with a 3% interest rate, your new loan would be $30,000 at 5%.
Private consolidation adds flexibility to both your term length and your interest rate. You can choose from a fixed or variable rate. Fixed rates do not change over time, while variable rates can rise and fall within a certain range. Variable rates can earn you lower interest payments than fixed rates, but there is a chance they can increase each year, resulting in you potentially paying a higher interest rate.
If you have a reasonable interest rate at the time of signing, a fixed rate can benefit you by ensuring your payments remain consistent over a 5, 10, 20, or 30 year period. However, some people prefer the flexibility of variable rates, which allows for the possibility of reducing your payment before the loan term ends.
Release a cosigner
Most federal loans don’t require a cosigner, but many people who took out private loans used a cosigner to qualify for their loan. If this is the case for you, but you have since become financially independent, you may want to release your cosigner from your student loans. Releasing a cosigner relieves them of their financial risk.
Many private student loans have cosigner releases, but some do not. You can consolidate your loan with a company that allows you to release your cosigner or one with less stringent cosign release qualifications.
Benefits Specific to Federal Consolidation
If you want to consolidate federal loans and keep some of the government benefits that come with them, you must consolidate them into another federal loan. If you took out Perkins Loans, you can consolidate them to qualify for income-driven repayment plans. Ask the loan servicer that handles your Perkins Loan about consolidation.
Consolidation may also qualify you for Public Service Loan Forgiveness. If you consolidate with a private company, you lose eligibility for all federal programs. Due to the difficulty of making qualifying payments, some people choose to forgo their federal program eligibility and consolidate with private companies.
Benefits Specific to Private Consolidation
Consolidating your education loans with a private company gives you the chance to lower your interest rate and refinance anytime. When you first consolidate your loan, if your financial standing is much improved compared to when you got your initial loans, you may qualify for a lower interest rate.
Private institutions determine your loan’s interest rate based on your credit score, income to debt ratio, and a variety of other financial factors. If they deem you a low-risk borrower, you get a lower interest rate than your previous loans.
If you do not earn a lower interest rate when you first consolidate, continue to check in with companies throughout the life of your loan. Refinancing your consolidated loan may be worthwhile if you improve your credit score or increase your income.
Refinancing your loan gives private companies a chance to reevaluate your risk level as a borrower. You will likely get a lower rate if you are deemed less risky.
How to Get the Best Consolidation Deal
Consider private and federal options when you decide to consolidate your student loans. Stay with federal loans if you want to keep government program benefits. If you already have private loans or hope to get a lower interest rate, look to private companies.
Like car loan shopping, when you search for private consolidation loans, compare quotes from at least three different private companies.
Every company has its own interest rate calculations, so you may earn a lower interest rate with one over another. Plus, you may be able to negotiate for a lower interest rate or better repayment options when you have offers from other private companies.
Consolidate Your Student Loans Today
The benefits of student loan consolidation make it an excellent choice for most people with student loan debt. Whether you want to make your payments simpler, reduce your monthly payments, or qualify for refinancing in the future, you should consolidate your loans as soon as possible.
Disclaimer: All content on this site is information of a general nature and does not address the circumstances of any particular entity or individual, nor is the information a substitute for professional financial advice and services.