How to consolidate student loans

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Student loan consolidation is the process of taking multiple outstanding loans and reorganizing them into a single loan, sometimes with a longer repayment period and therefore a lower monthly payment. If you’re in serious debt and ineligible for student loan forgiveness, consolidation could offer the solution you need.

What is a student loan?

A student loan is financial assistance that’s specifically designed to help students pay for school-related fees. These loans cover the cost of such things as tuition, school supplies, books and living expenses.

Like other loans, this type of financial assistance is money that you borrow and pay back with interest. Unlike many other types of loans, however, student loans typically don’t require you to start repayment until after the education has been completed.

Student loans are offered by a variety of sources, including the federal government, banks and online lenders. Many of these sources also provide student loan consolidation.

What types of loans can be consolidated?

Both federal student loans and private loans can be consolidated, although consolidating through private lenders is typically known as refinancing.

Federal student loans are eligible for consolidation through the U.S. Department of Education, which offers a Direct Consolidation Loan that allows for the combining of multiple federal education loans into one loan at no cost. You can also consolidate your federal student loans with private lenders, although you’ll lose federal benefits in doing so.

Private student loans cannot be consolidated with federal student loans, but they can be refinanced and consolidated through private lenders.

These are some of the federal loans eligible for consolidation:

  • Subsidized Federal Stafford Loans.
  • Unsubsidized Federal Stafford Loans.
  • PLUS loans from the Federal Family Education Loan (FFEL) Program.
  • Supplemental Loans for Students.
  • Federal Perkins Loans.
  • Nursing Student Loans.
  • Nurse Faculty Loans.
  • Health Education Assistance Loans.
  • Health Professions Student Loans.
  • Loans for Disadvantaged Students.
  • Direct Subsidized Loans.
  • Direct Unsubsidized Loans.
  • Direct PLUS Loans.

Should I consolidate my loans?

If you need more cash in your pocket right now, consolidation can help by extending the life of your loan and thus trimming your monthly payments — although extending your repayment timeline will ultimately increase the amount you pay in interest.

You may also have access to a new repayment schedule (like an income-based repayment plan) that’s a little easier on your wallet.

Keep in mind that federal consolidation loans do not work like private loans — the interest rate you receive will be the weighted average of all of the loans you’re consolidating, meaning the main benefits are longer repayment periods and the convenience of having one monthly payment.

How to consolidate your student loans

There are two options for consolidating your student debt. The federal student loan consolidation option offered by the U.S. Department of Education is the Direct Consolidation Loan.

“With this option, any federal loans that you choose to consolidate are paid off and you are issued a Direct Consolidation Loan for the total combined balance,” says Jessica Ferastoaru, student loans specialist for Take Charge America.

You can complete the Direct Consolidation Loan application online. Once submitted, it may take 60 days for your application to process, says Ferastoaru.

“You should continue to make your regular payments on your loans, if payments are currently due, until your consolidation has been approved,” explains Ferastoaru. “Once approved, you will have one monthly payment due to the new servicer managing your Direct Consolidation Loan.”

Yet another option is a private loan refinance, meaning you combine your federal student loans or your private student loans, or some combination of both, with a private lender.

Private loan refinancing has some significant drawbacks to be aware of, however, including different eligibility criteria.

“You will need to meet certain income and credit score requirements to qualify,” says Ferastoaru. This means a co-signer may be required to qualify.

More importantly, it’s critical to understand that if you consolidate federal loans with a private lender, you’re no longer eligible for any federal programs, such as those that allow you to postpone payments when you’re unemployed. In addition, you will no longer be eligible for federal income-driven repayment options, loan forgiveness or any sort of loan discharge.

How can I get the best interest rate?

If you’re consolidating your student loans through the federal government, your overall interest rate will remain the same. This is because a Direct Consolidation Loan charges the weighted average of all loans you’re consolidating.

However, it’s a different story if you’re refinancing with a private lender. Interest rates are determined by the federal government and change each year on July 1, so it’s a good idea to shop around with lenders to see how they respond to rate fluctuation.

Improving your credit score will also help you get the best loan rates possible, says Katie Ross, education and development manager for American Consumer Credit Counseling.

“Having a good credit score is the key to getting the best interest rate with any loan,” says Ross. “A credit score of 750-plus is generally considered good, with 800 or higher considered exceptional. The higher your credit score, the better your interest rate when you apply for a loan.”

Additional things to consider

When is the right time to consolidate loans?

“The right time to consolidate will be different for every borrower,” says Ferastoaru. “If payments are affordable when you graduate college, there may not be any reason to consolidate your loans at that time. But if you need lower payments right after graduating from college, federal student loan consolidation may be a good option to consider.”

For those who may be considering a private loan refinance in order to obtain a lower interest rate, it may be best to wait to explore this option until you have a steady income and strong credit history in order to increase your chances of qualifying.

“If you’re not yet employed right after graduation, it will be difficult to qualify for a refinance without a co-signer,” says Ferastoaru.

What kind of terms do lenders offer?

With federal consolidation loans, you can choose from a variety of repayment plans, sometimes up to 30 years. No application or origination fees are allowed, and there are no prepayment penalties.

Private consolidation lenders, on the other hand, are not subject to those terms and may include variable rates and any number of fees. What’s more, some benefits of a federal consolidation loan, such as interest subsidies on deferred loans, are not available on private loans.

Bear in mind that not all consolidators are created equal. Some offer favorable terms like interest-rate reduction for making on-time payments or choosing automatic withdrawal. Others may offer repayment plans that better suit your financial situation.

FAQs on student loan consolidation

How is loan consolidation different from loan forgiveness?

Unlike student loan forgiveness, consolidation involves working with a lender that will pay off your existing balances. The lender will replace those loans with a new, consolidated loan and a new monthly payment.

Consolidation involves changing the way you repay student loans rather than relieving you of the obligation to repay all the money you’ve borrowed. Student loan forgiveness is a process that erases financial obligation. Students who have entered careers in the military or other forms of public service, for instance, may be eligible to have their loans partially forgiven.

How is loan consolidation different from refinancing?

The difference between student loan consolidation and refinancing is subtle, and the terms are often used interchangeably. Both methods involve taking out a new loan to better manage multiple outstanding balances.

“In general, the term consolidation is used to describe the process of combining one or more federal student loans within the Direct Loan Program,” says Ferastoaru. “Combining one or more of your loans with a private lender is considered refinancing your loans, as you may qualify for a lower interest rate on your new private loan. With federal consolidation, you may qualify for more repayment options, but it is not a way to reduce your interest rate.”

Can I consolidate more than once?

Current law dictates that you can consolidate student loans only once. There are two exceptions:

  1. If you’ve since gone back to school and acquired new student loans.
  2. If an outstanding loan was excluded from your original consolidation.

Will consolidating my student loans hurt my credit?

If you’re consolidating student loans through what’s known as a debt consolidation loan, rather than through the Department of Education, then your credit score may drop initially, says Ross.

This is because any time you apply for new loans, it results in a hard inquiry on your credit. Too many hard inquiries will hurt your credit score,” Ross explains.

Over the long term, though, consolidating your loans may help your score if you make the payments on time every month. This is because payment history is one of the most significant factors in determining your credit score.

Completing a federal student loan consolidation, on the other hand, typically does not have a significant impact on your credit, says Ferastoaru. “Your previous loans are being paid off and you’re issued a new loan for the same amount, so your total amount of debt has not changed.”

The bottom line

There are many options when considering loan consolidation, so make sure to do your homework and investigate all the possibilities before applying.

But bear in mind that if you have federal student loans, consolidating through the U.S. Department of Education program may ultimately provide the best option over the long term, allowing you to remain eligible for income-driven repayment programs, loan forgiveness or loan discharge.

Featured image by David Shopper of Getty Images.

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