The Best Way To Consolidate Student Loans: Refinance Your Loan
Do you feel burdened by student loan debt? If this is the case, you may want to consider consolidating or refinancing your loans to reduce your monthly payments. In many cases, this is a wise financial decision. Here is the best way to consolidate student loans. However, before deciding to consolidate or refinance, weigh the pros and cons carefully.
There are two types of student loan consolidation: federal and private. Private consolidation is also referred to as refinancing. These processes are frequently confused, but they are very different. Here’s how:
- The Department of Education consolidates multiple federal loans into a single federal loan. You may need to consolidate to qualify for some federal loan programs, but federal consolidation will not lower your interest rate. It may reduce your payments by extending them.
- Student loan refinancing, also known as private student loan consolidation, is a financial move made through a private lender. You can save money by getting a lower interest rate if you qualify, but you will lose access to federal benefits.
Best Way to Consolidate private student loans
Consolidating or refinancing private student loans entails replacing multiple student loans; private, federal, or a combination of the two with a single, new private loan. If your new loan has a lower interest rate, you will save money.
When you refinance, your new interest rate will be determined by your financial history, which includes your credit score, income, job history, and educational background. To qualify, you typically need a credit score in the high 600s, and interest rates range from around 2% to more than 9%.
Consider private student loan consolidation if you have:
- Existing private student loans
- Credit scores of 690 or higher are generally considered good or excellent.
- A stable job.
- If that doesn’t describe you, you can find a co-signer who does.
Refinancing federal student loans into private consolidation loans means foregoing consumer protections unique to federal loans. These include the ability to tie payments to income and loan forgiveness opportunities.
Private companies, like the federal government, provide the option to consolidate multiple student loans into one. While private loans cannot be transferred to the federal government, they can be consolidated with a private lender.
The goal of this process is to obtain not only the convenience of a single payment but also a lower interest rate based on your financial history.
Compare monthly payments under three different scenarios using a consolidation calculator: federal student loan consolidation, private student loan refinancing, and income-driven repayment plans.
Best Way to Consolidate Federal Student Loan
Federal loan consolidation has no credit requirements and provides the benefit of a single loan bill and potentially lower payments. However, it is only available for federal loans and will not lower your interest rate. Consider federal consolidation if you:
- Consolidation is required to qualify for income-driven repayment or public service loan forgiveness. If you have Federal Family Education, Perkins, or parent PLUS loans, this is the case.
- Have FFELP loans and want to be eligible for loan cancellation?
- Want a single federal loan payment, but not one that is significantly lower
- Are in default on your student loans and want to get back on track
When federal loans are consolidated, the government pays them off and replaces them with a direct consolidation loan. You’re generally eligible once you graduate, drop below half-time enrollment, or leave school. Consolidating your federal loans through the Department of Education is free; avoid companies that charge fees to do so.
When you consolidate federal loans, your new fixed interest rate will be the weighted average of your previous rates, rounded up to the nearest one-eighth of 1%. For example, if the average is 6.15%, your new interest rate will be 6.25%.
More so, you will also be given a new loan term ranging from 10 to 30 years. Your repayment term will typically begin within 60 days of the first disbursement of your consolidation loan and will be determined by your total federal student loan balance, among other factors.
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How to Consolidate Federal Loans
Log in to studentloans.gov and select “Complete Consolidation Loan Application and Promissory Note.” You must complete the application in one sitting, so gather the documents listed in the “What do I need?” section. ” section before you begin, and set aside about 30 minutes to complete it.
- Enter which loans you want to consolidate and which you don’t.
- Select a repayment strategy. You can choose a repayment schedule based on your loan balance or one based on your income. If you choose an income-driven plan, you must then complete an Income-Driven Repayment Plan Request form.
- Before submitting the form online, read the terms. Continue making your regular student loan payments until your servicer confirms consolidation is complete.
If your loans are in default, consolidation is one of several options for getting them back on track. To consolidate defaulted loans, you must make three consecutive full, on-time monthly payments on the defaulted loan and agree to participate in an income-driven repayment plan.
Best Way to Consolidate Student Loans
You can consolidate federal student loans for free with the Department of Education at studentaid.gov. If you want to consolidate or refinance your loans with a private lender, then you can apply directly on the lender’s website.
Many financial institutions, including your local bank or credit union, as well as lenders who specialize in these types of loans, can help you consolidate your student loans. Earnest, LendKey, and SoFi are among the well-known names in the field.
How Do Student Loans Consolidation Work?
There are two basic methods for consolidating student loans. You have the option of using a private lender or the federal government. Federal consolidation is only available for federal loans.
In the case of private student loan consolidation (also known as refinancing), a private lender, such as a bank, pays off your private or federal student loans. It then issues you a new loan with a new interest rate and repayment schedule. Refinancing makes the most sense if you have high-interest private loans and can obtain a significantly lower rate or better terms with the new loan.
However, if you have federal student loans, you can combine them into a new direct consolidation loan through the Federal Direct Loan Program. Your new interest rate will be the weighted average of your previous loans, and you will continue to be eligible for some of the benefits of federal loans, as we will explain later.
While private loans cannot be consolidated into federal loans, if you have both private and federal loans, you can consolidate the private with a private lender and the federal with the government program.
Important Notice! If your student loan is still in grace, wait until it expires before refinancing it.
The Benefits and Drawbacks of Student Loan Consolidation
Here are the major advantages and disadvantages of both private and federal loan consolidations.
Advantages of Student Loan Consolidation
Below are the pros of student loans consolidation:
1. Reduced Monthly Payments
By offering you a lower interest rate, private loan consolidation can help you reduce your monthly loan payments. This results in lower overall payments and a savings over the life of the loan. Many graduates also discover that as their credit scores improve, they can obtain better interest rates.
A private consolidation or refinancing can also reduce your monthly payments by extending the term of your loan. For example, refinancing a 10-year student loan into a 20-year loan will result in a significant reduction in monthly payments. However, as we will explain later, signing up for a longer loan comes with a significant disadvantage.
2. Flexible Payment Terms
When you consolidate your loans with a private lender, you can specify how long the loan will last and whether it will have a fixed or variable interest rate. A variable rate is riskier because interest rates can rise at any time, but it can also get you a lower interest rate at the start of the loan. The interest rate on federal consolidation loans is fixed.
3. Fewer Monthly Payments
Keeping track of multiple student loan payments on top of all other bills can be difficult. Consolidating your student loan debt can help you reduce your monthly bills to a single payment (or two, if you consolidate your private and federal loans separately, as is advisable).
Many private lenders will even lower your interest rate if you sign up for an automatic payment plan. This option saves you a small amount of money each month and keeps you from missing a payment.
4. Cosigner Release
Another advantage of refinancing your personal loans is that you may be able to sign for the loan on your own. Dropping a cosigner, typically a parent or another close family member, not only relieves them of your debt, but it may also raise their credit score and allow them to access new lines of credit if necessary. Cosigners are not usually required for federal loans.
Disadvantages of Student Loan Consolidation
- You may end up paying more in the long run.
- You may lose the benefits of a federal loan.
- Any existing grace periods may be eliminated.
Student Loans That Cannot Be Consolidated
Consolidation of private student loans is not possible. Direct PLUS loans, which are loans taken out by parents to pay for their children’s education, cannot be combined with other student loans in the child’s name.
Is It a Good Idea to Consolidate Your Student Loans?
Yes, consolidating your student loans can be a wise decision if you have loans from multiple service providers. Consolidation enables you to have a single loan with a single monthly payment, making it easier to manage. Consolidation may result in a lower interest payment as well.
Another advantage of consolidation is that it allows you to repay your loans over a longer period of time, lowering your monthly payment. However, this may increase the total interest you pay on your loan.
Consolidating your multiple student loans can make it easier to manage your debt. It could also result in lower interest rates. If you are finding it difficult to keep up with the costs of your student loans, considering consolidation may help. Before doing so, consider the benefits and drawbacks of consolidation.
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