What Is Student Loan Consolidation?
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.