The latest figures on student loan debt in the U.S. are staggering.
More than 40 million Americans now carry some form of student loan debt, averaging just over $35,000 each.
To make matters worse, most student loan borrowers are carrying multiple loans from multiple sources, which can increase the cost and the complexity of managing them. It gets far worse for recent college grads who have trouble finding or keeping a good-paying job.
When student loans become unmanageable, the best option may be to consolidate them into one loan.
In some cases, a student loan consolidation may not substantially reduce your loan costs or monthly payment, but it will certainly make managing your loan payments much easier.
Depending on the type of student loans you have there are a couple of different ways you can consolidate them.
If you have federal loans, you can consolidate them through the U.S. Department of Education using a direct student loan consolidation program.
If you have multiple private student loans, you won’t be able to consolidate them with a federally-sponsored direct student loan consolidation program, but you can consolidate them by refinancing them with a private lender.
If you have both federal and private student loans, the only way you can consolidate them all into one loan is by refinancing all of them with a private lender; but there are several reasons why that is not a good idea.
Federal Student Loan Consolidation
All of your federal student loans are eligible for consolidation.
The good news is if you have any loans issued with a variable rate, they will be consolidated into a fixed rate direct consolidation loan. That can save you in interest costs if your variable loan rates are increasing.
The fixed rate on a consolidated loan is determined by taking the weighted average of the rates on your various federal loans and then rounding it to the nearest one-eighth percent. There is no cap on the fixed rate that is issued, but the rate is locked in for the life of the loan.
In addition, when you consolidate your loans, the new loan is issued with a 20 or 30 year term, which can extend your loan period beyond the standard 10-year period for most federal loans. This will have the immediate effect of lowering your monthly payment, though it will increase your interest costs over the term of the loan.
As your income and cash flow increases, you can increase your monthly payments to pay your loan off more quickly.
With a direct consolidation loan, you can choose from several different repayment plans, each designed for different financial circumstances.
Standard Repayment Plan: For borrowers who can afford the minimum payment on a standard 10- to 30-year term. The minimum payment is $50.
Graduated Repayment Plan: Your payments start out low and increase every two years.
Extended Repayment Plan: If you have more than $30,000 in direct loans, the payment period can be extended using the standard or graduated repayment options.
Income-Driven Repayment Plans: If you are experiencing a financial hardship, you can extend the term of the loan and have your payments adjusted based on your income and family size.
When you consolidate your federal loans, you retain all of the protections that come with them, including the options of forbearance and deferment.
If you are eligible for loan forgiveness in the future, you retain your eligibility as long as you meet the requirements at the time you request it.
Private Student Loan Consolidation
Private student loans can only be consolidated through a private lender.
Essentially, the loans are refinanced into a single new loan.
Unlike a federal loan consolidation, which doesn’t have any credit requirements, you must be able to qualify for a refinanced loan based on your income and credit.
If you are unable to qualify yourself, you can bring a cosigner, such as a parent, who can qualify. While private loan refinancing can result in a lower interest rate, if you or your cosigner cannot qualify for a low rate, you may not be able to lower your average rate by much.
If you select a variable interest rate, which means the loan rate will increase if market interest rates increase.
It’s possible that the monthly payment on your consolidated loan could eventually be higher than your current loans.
Think Twice about Refinancing Federal and Private Loans Together
Private lenders promote their ability to consolidate both federal and private student loans.
They will happily refinance both into one loan.
The problem is, when that happens, you will lose all of the protections afforded you through your federal loans, including deferment and forbearance.
In addition, you the opportunity to change to one of the income-driven repayment plans which come in handy during a period of financial hardship.
Finally, and most importantly, when you refinance your federal loans, you are no longer eligible for loan forgiveness. If you are at all concerned that you might need these protections in the future, it is best to keep your private and federal loans separate.
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Student loan consolidation is a viable option for any student borrower seeking to lighten the burden of
managing multiple loans.
Your options under the federal direct student loan consolidation program are fairly clear; however, if you have private loans to consolidate, you have much more to consider, including your ability to qualify and the disadvantage of a variable rate.
For many student borrowers, refinancing federal loans with private loans may not be in their best interests if they should ever experience a financial hardship or if they want to remain eligible for loan forgiveness.