Prev NEXT  

Advertisement

How Student Loan Consolidation Works

What Is Student Loan Consolidation?

student loan consolidation
If you have multiple federal student loans, consolidating them into one could help reduce your monthly payment. Anchiy/Getty Images

Advertisement

Student loan consolidation has changed significantly in the past decade, and more changes may be on the horizon. Currently, a student loan consolidation refers to combining multiple federal education loans into one loan. Called a direct consolidation loan, it is performed by the U.S. Department of Education and requires no application fee. If you receive an offer for a "loan consolidation" that charges a fee, that is from a private lender offering the service.

Only federal student loans are eligible for direct loan consolidation. Private student loans cannot be incorporated into a federal loan consolidation. If you have both federal and private student types, you can still consolidate all of your federal loans with a direct loan consolidation. You may also be able to refinance your private loans with your existing lender or another lender. As a third option, you can refinance your federal and private loans together with a private lender. Just keep in mind, consolidating a federal loan to a private will change your loan terms significantly. Each option comes with benefits and drawbacks.

With a college education more expensive than ever, many students will find themselves graduating with a degree, but also with a large, complex debt. Student loan consolidation can make dealing with the mechanics of that debt a little easier. Here are a few reasons why consolidating student loans might be a good idea:

  • You'll have the advantage of paying just one servicer rather than several.
  • Consolidation can lower your monthly payment.
  • You might gain access to new repayment plans, especially a variety of income-driven repayment plans, some of which end in loan forgiveness.
  • You can lock in a fixed interest rate.

So when (and if) student loan consolidation is possible is something each customer needs to look into on an individual basis. But there are a few general tips to following when considering loan consolidation:

  • Consolidating student loans is ideal when the loans begin coming due, generally six months after graduation, or within the same period of when a student stops attending school.
  • Today, student loans are tied to a fixed rate rather than the variable prime. Depending on the rates of your existing loans and today's current student loan interest rate, consolidation, if possible, could mean a lower interest rate.
  • Income-driven repayment plans have a forgiveness feature, which eliminates the outstanding balance on federal student loans after a specified number of years of on-time payments — generally 20 to 25. The Public Service Loan Forgiveness (PSLF) program can bring the consecutive payments to 120 for borrowers employed full time for a federal, state, local or tribal government or a nonprofit.

Overall, weighing your economic situation versus the terms of the loan is beneficial in determining whether you want to consolidate your loans.

Advertisement


Advertisement


Advertisement



Advertisement

Advertisement