Understanding Student Loan Consolidation

What Is Student Loan Consolidation?

Student loan consolidation is the process of uniting some or all of your student loans into one new loan with one lender. By consolidating student loans, the borrower would have only one student loan, with one monthly payment, interest rate, and term. People usually consolidate or refinance their student loans to lower and/or simplify their payments.

The Complete Guide to Student Loan Consolidation and Student Loan Refinancing

Step One

Understand the Difference Between Federal Student Loan Consolidation vs. Private Student Loan Refinancing – Both of these programs can lower your payments but in very different ways. Federal consolidation offers payment flexibility and long-term forgiveness options, while private consolidation can lower your interest rate (thereby lowering your monthly payment as a result). Understanding the benefits and risks of each program will help you decide which one is the better fit.

Step Two

Understand Your Monthly Payment and Total Repayment – Both consolidation options allow you to go from multiple loans to a single new loan with one payment, one interest rate, one term, and one lender. With federal consolidation, you have the choice of multiple repayment options which can base your monthly payments directly on your income and family size. Your interest rate will be a weighted-average from your previous federal loans. You will also be able to see your total repayment amount at any time with this new loan and enjoy forgiveness of any remaining balance once your term is completed. With private consolidation, a private lender can directly lower your interest rate, thereby making your monthly payments that much lower as a result. They can also increase the length of your repayment term which can make for lower monthly payments (but possibly a larger total repayment once the term is completed). The private lender and program you go with will ultimately decide how your monthly payment and total repayment amounts are affected.

Step Three

Determine Your Eligibility – Whether your student loans are federal or private will determine which consolidation programs are available to you. Federal consolidation and forgiveness requires that you have direct federal loans, while both federal and private loans are eligible for private consolidation/refinancing.

Step Four

Take Action – Once you understand the differences and benefits of both consolidation programs and your eligibility for either one, the fourth step is to take action and begin the application process.

Federal Student Loan Consolidation:

Federal consolidations are an excellent choice for those looking to lower their monthly payments and pursue long-term forgiveness options. It’s especially helpful for low-income borrowers as payments are based on discretionary income, which in some cases can lead to $0 monthly payments!

Federal consolidations are available to borrowers who have direct federal loans and are no longer in school. Consolidation is done through The William D. Ford Federal Direct Lending Program.

Private Student Loan Consolidation/Refinancing

Private consolidation/refinancing is a great option for someone looking to lower their interest rate and thereby their payments (and the total amount paid) going forward. Unlike federal consolidation, private consolidation can be done for both private and federal student loans.

A private consolidation is a great option for borrowers who already have a high-interest rate on their student loans. By consolidating or refinancing at a lower rate, the borrower can enjoy significant savings over the term of the loan.

Overview of how Federal Student Loan Consolidation Works

  • A borrower with multiple federal student loans applies for consolidation
  • If the borrower is eligible, their loans are then combined into one new consolidated loan with a single payment, interest rate, term, and lender
  • The borrower is then able to enroll in an income-based repayment program that includes long-term forgiveness options (Note: federal consolidation sets your payment based on your income, it does not lower your interest rate)

Generally speaking, federal loan consolidations are relatively easy to qualify and apply for (and offer MANY more benefits than private consolidations). They also offer many benefits to cash-strapped borrowers and those struggling with their student loan payments today.

Overview of how Private Student Loan Consolidation

A private consolidation is a great option for borrowers who already have a high-interest rate on their student loans. By consolidating or refinancing at a lower rate, the borrower can enjoy significant savings over the term of the loan. These lower rates can be available to borrowers for a variety of reasons: Interest rates have come down since the borrower took out their loans. The borrower has become more creditworthy since graduating (has higher income, better credit score, etc.)

Here are the basic student loan refinancing requirements:

  • Good Credit: Score generally needs to be above a 660
  • Good Debt-to-Income Ratio: Generally banks want this to be lower than 40-45%
  • Proof of stable income: Typically more than $25k/year

FAQ – Federal Student Loan Consolidation:

What types of federal student loans are eligible?

Only direct federal student loans can be consolidated under this program.

When can my loans be consolidated?

You are typically able to consolidate after you graduate, leave school, or fall below half-time enrollment.

Will my interest rate change?

Possibly, But federal consolidation does not lower your interest rate, it simply takes a weighted-average rate of the loans you already have. Because federal consolidation doesn’t change your rate, if you are a highly creditworthy borrower, you may want to consider private consolidation or refinancing.

Will federal consolidation change my repayment options?

Federal student loan consolidation often allows you to extend your repayment term based on your consolidated loan balance. Borrowers are often able to extend their term from 10 to up to 30 years. This may lower your monthly payment (but may also increase the total amount you pay over the longer term).

When will I begin repayment on my consolidated loan?

Repayment on a consolidated loan begins immediately, with most borrowers receiving their first bill within 60 days of approval and disbursement of their newly consolidated loan.

Can I still take advantage of my grace period?

Yes. If any of your current student loans are still within their grace period, you can delay repayment on your newly consolidated loan until your grace period end-date. You can do this by asking the loan servicer of your consolidated loan to delay processing your application until toward the end of your current grace period.

What if I’ve already consolidated my federal student loans?

In this case, you cannot re-consolidate unless you have added another federal student loan to your total loans since then.

Can I consolidate my student loans if I’m currently in default?

Yes, as long as you don’t have a wage garnishment against you. Consolidating your defaulted student loans and enrolling in an Income-Based Repayment plan can be a great way to get a “fresh start” and make your student loan situation much more manageable. Those that have a wage garnishment must first go through rehabilitation before being eligible to consolidate.

By consolidating, can I take advantage of Income-Driven and Forgiveness Plans if I’m eligible?

Absolutely! This is often one of the best reasons to consolidate your federal student loans. Keep in mind though, you are not automatically enrolled into the income-driven plans. You must choose this option when consolidating (or later on) to take advantage of them. Further, not all federal loans are eligible to enroll in all income-driven plans.

Can I apply for federal consolidation online?

Yes, you can apply directly online.

How can I learn more before I apply?

You can learn more about the federal consolidation process and your options through the Department of Education as well as our federal student loan consolidation page. You can also call 1-844-832-7070 to talk to a company specialist focused on assisting borrowers & students.

FAQ – Private Student Loan Consolidation:

Am I eligible for private student loan consolidation?

Because private institutions do these, there is no automatic eligibility. Generally, you will be evaluated based on your creditworthiness. If you are behind on your loans, it’s unlikely that you will be eligible.

When can my loans be consolidated into a private loan?

You are typically able to consolidate after you graduate, leave school, or fall below half-time enrollment.

Will this lower my interest rate?

This depends, on your current rate and your credit worthiness. If you have a high rate and a good credit score, you may have a good shot at eligibility. Lend-Key and Common-Bond are just a few of the sites that can help you.

How much does private student loan consolidation/refinancing cost?

It varies depending on which private lender you decide to work with.

If I’m struggling with my private loans, are there forgiveness programs or other ways to reduce my payment?

There are currently no forgiveness programs for private loans, but some law firms specialize in private student loan relief. Global Student Loan Forgiveness may be able to help you identify those firms that specialize in this area. Click here to learn more about those options or call us for more information at 1-844-832-7070.

For more information on both federal or private student loan consolidation & forgiveness, call 1-844-832-7070 today.