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- Combining multiple student loans can make payments more manageable and save you money.
- If you have federal student loans, apply for a Direct Consolidation Loan through the government.
- For private student loans, you can refinance them through a private lender at a lower interest rate.
What is student loan consolidation?
Combining federal student loans
After you've taken an inventory on your student loans and have decided to combine them, it's time to consider consolidation vs. student loan refinancingand choose the method that's best for your situation.
Loan consolidation is when you take multiple federal loans and turning them into a new Direct Consolidation Loan. Before pursuing loan consolidation, you'll want to know what your new monthly payment is, how long your repayment term is, as well as your prospective interest rate. Looking at these factors can give you insight into which option is best for you.
One servicer, one payment
The main benefit of consolidating federal student loans is that you streamline your monthly payments. Instead of making payments to multiple loan servicers and managing multiple payments, you only have one loan and one payment to manage.
Why consolidate student loans?
Lower monthly payments
When you consolidate your student loans, you merge all of your loans into one. This helps simplify repayment so you have a single loan and one monthly payment, and you can work with your loan servicer to establish a monthly payment amount that works for you. This will most likely be the case if you extend your loan term (up to 30 years).
Access to different repayment plans
With loan consolidation, you can qualify for income-driven repayment plans (IDR) that were previously unavailable. With an income-driven repayment plan, your monthly payment is tied to your discretionary income (income above a certain threshold).
Streamlined loan management
By streamlining the management of your loans, you can more easily track payments and stay on top of your debt, as opposed to searching for separate statements every month.
Is student loan consolidation right for you?
Weighing the pros and cons
A few of the pros of student loan consolidation include lowering your monthly payment, establishing a fixed interest rate, and becoming eligible for IDR plans or Public Service Loan Forgiveness.
However, there are several drawbacks to consider. These include potentially higher interest rates or losing your benefits as a borrower. For example, you might forfeit certain options like Public Service Loan Forgiveness (PSLF) or loan cancellation for teachers.
When NOT to consolidate
If you're close to PSLF forgiveness, have high-interest private student loans, or want a lower interest rate, student loan consolidation may not be a smart option for you. Instead, consider loan refinancing.
Student loan refinancingis a way to roll all of your existing loans into a new loan, ideally with a lower interest rate. You apply for a refinancing loan, which pays off your current student loans, then you pay off the new loan. The new loan will likely be at a lower interest rate, so you'll have just one monthly payment and save money on interest as well.
When you refinance through a company like LendingTree or SoFi student loans, you're working with a private lender. Each lender will have various terms, pros, and cons. In general, though, the main benefit of refinancing student loans is getting a lower interest rate. In some cases, you could save thousands of dollars in interest by refinancing.
Additionally, you make the payment more manageable by downsizing from multiple loans to one.
Student loan consolidation FAQs
Is there a fee to consolidate federal student loans?
No, there is no fee to consolidate federal student loans. The Federal Direct Consolidation Loan program is free.
What is the interest rate on a consolidated loan?
The interest rate on a consolidated loan is a fixed rate. It is based on the average of the interest rates on the loans you're consolidating.
How do I apply for consolidation?
To apply for student loan consolidation, go through the Federal Student Aid website.
How does consolidation affect my credit score?
Student loan consolidation can temporarily lower your score due to a hard credit inquiry, but responsible repayment over time can improve it.
Can I add loans to my consolidation later?
You generally can't add to the student loans you've already consolidated, but you can apply for a new consolidation loan if needed.
MelanieLockertis the founder of the blog and author of the book, "Dear Debt." Through her blog, she chronicled her journey out of $81,000 in student loan debt. Her work has appeared on Business Insider, Time, Huffington Post and more. She is also the co-founder of theLola Retreat, which helps bold women face their fears, own their dreams and figure out a plan to be in control of their finances.
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