Are you thinking about the consolidation of student loans debt? We can help you to understand all your best student loan consolidation options and make the right decision for you.
What’s Student Loan Consolidation?
Consolidating student loans is the process of combining multiple student loans with different terms and rates into one loan.
Consolidating your education loans can be done in two ways:
- Consolidation Loan Federal student loans from U.S. Department of Education.
- Refinance student loans from a private lender to reduce the rate.
What’s a Direct Consolidation loan?
Direct Consolidation Loans combine all federal loans to create one loan. This loan will continue for its remaining term. Federal student loan consolidation allows you to pay only one monthly loan payment to one servicer, with a fixed rate. You should note that private student loans cannot be combined with a Direct Consolidation loan.
Consolidating federal education loans may make student loan borrowers’ lives easier in terms of payment, but direct student loan consolidation doesn’t save any money. The new interest rate for a direct consolidation loan is simply an average* weighted of your current rates.
*What is a weighted mean? Let’s say you have two student loans that you are eligible for: one loan for $10,000 with a 6.6% interest rate, and another loan for $5,000 with a 5.5% interest rate. The following formula will calculate your new rate: $10,000 is 2/3 of the total loan amount, and $5,000 is 1/3. You’d divide each interest rate by this fraction and add them together: ( 2/3 * 6%)+ ( 1/3 * 5%) = 5.67%. The weighted rate is then multiplied by the nearest one-eighth 1% (in this instance, it would be multiplied to 5.75%).
What’s Private Student Loan Consolidation?
Student loan refinancing, sometimes called private student loan consolidation, is available for both federal and private loans. A private lender will provide you with one loan that pays off all your existing loans. Refinance your student loans and consolidate your existing loans. You also get a new term and interest rate that are based on your financial situation, not your old loans’ terms and rates. The new interest rate can reduce the interest cost of your student loans significantly over the repayment period. Consolidating your loans may allow you to release a cosigner for the amount of the loan.
Student loan refinancing requires a thorough credit check because it involves an assessment of your financial history and current financial situation. Sometimes, this can have a temporary but small impact on your credit score.
Refinancing offers more than a new interest rate. It also allows you to choose your monthly repayment term. You can save money by paying lower monthly bills and having a longer term. You can also choose a shorter-term loan term if you are looking to pay your loan off more quickly. Your new loan can be financed at either a fixed or variable interest rate. Student loan refinancing offers a more flexible repayment plan than student loans consolidation.
Also Read:
- 6 Best Ways To Deal With Student Loan Debt: All You Need To Know
- Differences Between Student Loans Forgiveness, Cancellation, and Discharge
- How to Make The Minimum Amount On Your Student Loan Payments?
- Private student loan forgiveness programs
- Complete Guide About Student loans and Fedloans
What are Eligible Loans For Private Consolidation?
Refinance and consolidate federal and private student loans. This applies to all federal loans, including Direct Loans and Stafford Loans as well as Parent PLUS Loans.
Refinance and consolidation allows you to choose which loans you wish to consolidate and which you would like to keep at the current terms. While some people might want to refinance all of their loans, others may prefer to just refinance a few.
Refinance federal loans or private loans into a single private loan and you won’t be eligible for repayment options that are income-based, forgiveness programs, or programs such as public service loan forgiveness.
You should consider the terms of each loan, as well as whether refinancing might be a better option.
Consolidating Student Loans is Smart?
Consolidating student loans is simple. You only have to make one monthly payment instead of multiple monthly payments. This lowers the chance that payment slips through the cracks, which can negatively impact your credit score.
If you’re satisfied with the interest rates on your loans, you plan to use an income-based repayment program like PSLF or you are working towards improving your credit score for refinance applications, a federal direct consolidation loan might be an option. Consolidating your student debt can give you the opportunity to extend your repayment terms with lower monthly payments, but it may also mean that you will pay more interest over time.
Can consolidating student loans hurt my credit?
Direct loan consolidation generally has no adverse effect on credit. Contrary to student loan refinance, direct loan consolidation does not require a hard credit draw (aka a credit review). This can have a short-term effect on your credit score and may show up later on your credit report. Direct consolidation loans allow you to pick a monthly payment that is comfortable for you. This makes it less likely that you will miss a payment or pay late.
What are the pros and cons of student loan consolidation?
A simplified loan payment is the number one benefit of student loan consolidation. You can also choose a longer loan term to reduce your loan payments. There may be downsides to consolidating student loans, depending on your existing loans. Teachers and public servants may be eligible for Perkins loans forgiveness. Consolidating these loans would end access to and eligibility for this loan forgiveness option. Consolidating them will also eliminate any grace period or deferment that you may have with your existing loan program.
What Loans Are Eligible for Private Consolidation
Refinance your total federal and private student loan amounts. This applies to all federal loans, including Direct Loans and Stafford Loans.
Refinance allows you to choose which loans you wish to refinance and which student loans you would like to keep. Refinances may be requested by some people, while others may prefer to refinance a portion of their loans.
Remember that if you refinance federal and private loans into a private loan, you won’t be eligible for the income-based repayment programs of the government.
You should consider the terms of each of your loans and whether refinancing could help you make a decision.
Which should I choose?
| Consolidate immediately if: | Refinance (private consolidation), if you are: |
| You don’t have a steady source of income at the moment. | You have a steady income and a full-time job offer. |
| An income-based repayment plan will be used. | You won’t be using an income-based repayment plan. |
| Your current loans are satisfactory. | You can customize the repayment term to suit your budget, and you will save money by paying lower interest rates. |
