Student Loan Consolidation: What You Need to Know

Debt graduate student with diploma in hand, grinning

Many Americans are not financially prepared to pay for their college tuition out of pocket, not to mention all the other fees that come along with studying at a state or private university. Given how expensive it is to attend college, it’s not uncommon for students to take out multiple federal or private loans to finance their education. According to College Data, the average cost to attend college for state residents at a public university in 2018 was $9,970. Upon graduation, the average student owes around $37,172.

For students making payments to multiple lenders, paying off student loan debt can become a hassle. Keeping track of when payments are due, and not being able to afford those payments on a monthly basis, can quickly put students in a financial bind. To remedy this problem, many students turn to consolidating their loans to simplify the payment process.

What Is Student Loan Consolidation?

Student loan consolidation is the action of combining several student loans into a bigger loan under one lender. By consolidating your loan, you reduce your payments to a single monthly payment. Loan consolidation is ideal if you can’t afford your monthly payments, would like a fixed interest rate over the duration of the loan, or if you don’t qualify for income-driven repayment (IDR) plans or Public Service Loan Forgiveness (PSLF).

If you consolidate your student loans, you may lower your monthly payment and interest rate, which will extend the payment period. Although this means it will take you longer to pay back your loan in full, it will put less strain on your budget in the early stages of your career.

What Is Federal Student Loan Consolidation?

illustration of student loans being funneled into one payment

Federal student loan consolidation allows you only to consolidate student loans that are federally guaranteed. Private student loans, or loans borrowed from a private lender such as a bank, cannot be consolidated with your federal loans. When taking out a federal student loan, there are generally two types to choose from: Stafford loans and Parent PLUS loans.

Stafford Loans

Stafford loans are financed by the United States Department of Education, and are the most common type of federal student loan. There are two types of Stafford loans available: subsidized and unsubsidized.

Subsidized Stafford loans are available to students of families facing financial difficulties. Repayment doesn’t start until after graduation, and the federal government covers the interest while the student is in school. Unsubsidized Stafford loans defer payments until after graduation, but the student (or parent) must make monthly payments to cover interest.

PLUS Loans

PLUS loans, or Parent loans, are available to parents of dependent students. These types of student loans have no maximum loan amount and are intended to cover fees like room and board that aren’t included in a standard financial aid package.

Direct Consolidation Loans

Because parents and students will likely take out several loans issued by various lenders in the course of the student’s college career, it’s common to have anywhere from eight to 10 different loan payments a month upon graduation. To streamline the repayment process, many students apply for a Direct Consolidation Loan.

In addition to simplifying repayment, a Direct Consolidation Loan comes with a fixed interest rate and level payments throughout the life of the loan.

Student Loan Consolidation vs. Student Loan Refinancing

illustration of student loan vs. loan refinancing comparison points

Student loan consolidation and student loan refinancing (also known as “private student loan consolidation”) are similar in that they both ultimately achieve the same goal: They combine multiple recurring student loan payments into one single payment. However, there are some key differences between the two that you should be aware of.

Federal student loan consolidation is only possible through a Direct Consolidation Loan via the federal government, specifically the Department of Education. Refinancing, however, applies to both federal and private loans, and allows you to transfer any number of those loans to a private lender, such as a bank or credit union. When the lender purchases your loans, you get a new interest rate determined by your credit score, income, and the weighted average interest of the loans being consolidated. You may also have the option of selecting a fixed or variable interest rate.

When it comes to repayment, federal loan consolidation gives you two options: You can either stick to a standard 10-year repayment term, or apply for an income-based repayment plan. The latter is more affordable, but it can potentially double your repayment term. If you choose to refinance, you may be offered several options depending on the lender, typically ranging from five, 10, 15, and 20 years.

How to Consolidate Your Student Loans

Image of dad and daughter looking at a laptop and laughing together

So, how do you go about consolidating your student loans? If you want to federally consolidate your loans, then you can take care of it in four simple steps:

  1. Go to studentloans.gov, log in, and then click on “Complete Consolidation Loan Application and Promissory Note.”
  2. Have a list of any federal loans you want to consolidate ready, and enter them.
  3. Select a repayment plan. You can either opt for a repayment timeline based on your loan balance, or select an income-driven plan. If you choose an income-driven plan, you’ll need to fill out an Income-Driven Repayment Plan Request form.
  4. Read the terms and conditions and then submit the form.

If you want to privately consolidate your student loans, you need to compare lenders so you can make sure you lower your interest rate. This process is a little more involved, so here are some steps to help you:

  1. Compare rates from different online lenders. You will need to submit personal information, such as your name, address, income, degree and university, total student loan debt, and more depending on the website.
  2. Set your loan terms once you’ve found an appealing offer. Do you want a shorter term with heftier payments, or a longer term with cheaper payments?
  3. Submit an application to refinance your loans. To do this, have the necessary documentation handy, such as income statements, proof of citizenship, a valid ID, and any official paperwork from your private or federal loans.
  4. Pay your loans until your application is approved. The process may take a few weeks, so don’t miss any payments until your new repayment starts.

If you’re struggling to meet your student loan payments, then consolidating your student loans, be it federally or through a private lender, is worth looking into. Both options can help you find a payment plan that’s more agreeable to your budget so you’re financially equipped for the future.

Sources: Studentloans.gov | U.S. Department of Education | College Data | Forbes

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