How to Consolidate Student Loans

With 44.2 million Americans carrying an estimated $1.48 trillion in student debt, it’s safe to say that student debt is a pervasive problem that needs a solution. Student debt can make it hard to do things like save for retirement or have disposable income. Two popular options for solving this issue are refinancing or student loan consolidation. […]

BY GoodCall

How to Consolidate Student Loans

With 44.2 million Americans carrying an estimated $1.48 trillion in student debt, it’s safe to say that student debt is a pervasive problem that needs a solution. Student debt can make it hard to do things like save for retirement or have disposable income. Two popular options for solving this issue are refinancing or student loan consolidation. In this guide, we’ll provide an in-depth explanation of the pros and cons of student loan consolidation (both federal loan consolidation and private loan refinancing), the differences between each and summaries regarding which are the best options.

What is student loan consolidation?

Student loan consolidation is a tactic for making repaying your student loans more manageable. It involves combining student and parent loans into one through a single lender. That larger, single loan pays off all the balances of the loans you want to merge. This leaves you with only one payment to make every month as opposed to having to balance a variety of payments. Student loan consolidation is also available for those who need more management payment options.

Advantages of student loan consolidation

The benefits of student loan consolidation include that you’ll have an easier time managing your debt, there’s more time to pay off the debt, payments might be lower, you can get on an income-contingent payment plan and you can choose your servicer. Additional advantages include the loan having a fixed rate, an increase in deferment and forbearance options, loan discounts are available and you’re protecting your credit.

The difference between consolidation and refinancing

Federal loan consolidation

A federal loan is when the U.S. Department of Education loans you money for college that’s available with the William D. Ford Federal Direct Loan (Direct Loan) Program. Qualifying for federal loan consolidation involves having a federal loan because you are ineligible for private student loans. Other qualifications include having a valid social security number and, if you’re a male, being registered with the selective service. Citizens or eligible non-citizens may apply and all applicants must have their high school diploma or an equivalent. Every student must maintain a GPA of at least 2.0 and be in good financial standing with the federal financial aid. High school students must fill out the FAFSA (Free Application for Federal Student Aid) before their freshman year, and then continue filing that form every semester following.

Pros:

  • Fewer payments to manage monthly
  • Can switch variable to fixed rates
  • Monthly payments might be lower

Cons:

  • Lower payments sometimes mean lengthier payment terms
  • You’re paying more interest through the duration of the loan
  • No variable rate means you’re stuck if rates fall because you can only consolidate once

Private loan consolidation

Non-federal institutions, including banks, credit unions and state loan programs, offer private student loans. If you receive a loan through your university or any non-federal lending institute, then it’s a private student loan. Student loan consolidation for private loans is another way of saying you’re refinancing that debt. If you believe you’ll receive a lower interest rate, it’s beneficial to take this action. Some lending institutions will allow you to consolidate federal and private loans into one manageable payment. You can qualify for private student loan consolidation if your credit is in good standing, you’re at least 18 years or older and are a U.S. citizen or permanent resident. While most lending institutions set guidelines for their lending qualifications, you’ll still need verifiable income and to be the primary borrower on the loans you’re consolidating.

Pros:

  • You may experience lower payments
  • If you have good credit, you might see lower interest rates
  • Helps you dodge or prevent defaulting

Cons:

  • You might lose borrower benefits
  • Payment periods are longer
  • Variable rates might become an issue

Best student loan consolidation companies

LenderBBB RatingBest ForDeferment or Forbearance Available?Co-signer Release Available?
CommonBondB+Customer Service YY
DiscoverA+Customers who didn’t graduate. YY

    *As of 01/30/2020

Things to consider before consolidating

Student loan consolidation can only occur once, so make sure you do your research. Another consideration is that a fixed rate is always better than one that’s variable. The main reason is that if you consolidate with a variable rate and it gets too high, you can’t change it because you can only consolidate once. The last thing to consider is whether or not the interest rate is lower than what you’re already paying. If you consolidate and the interest is higher, there are no money savings.

How to consolidate student loans

How to consolidate federal student loans (step-by-step)

  1. Step one: Visit studentloans.gov and enter your FAFSA ID. You should already have this ID from when you applied for student aid initially.
  2. Step two: Click on “Apply for Loan Consolidation” on the home page. Then, click “Start.”
  3. Step three: Select the loans you need to consolidate.
  4. Step four: Loans that are in a grace period may have processing delays between one and nine months.
  5. Step five: Select a servicer, like Navient, Nelnet, Great Lakes Educational Loan Servicing or FedLoan Servicing.
  6. Step six: You’ll need to select a new repayment plan regardless of what you were paying previously.
  7. Step seven: Submit the application with personal information and references.

Step eight: The next steps after the application include maintaining your current payment schedule while waiting for a loan servicer to contact you.

How to consolidate private student loans (step-by-step)

  1. Step one: Research the best lending institution for your student loan consolidation needs.
  2. Step two: Take inventory of all your private student loan debt, the payment amounts and interest rates.
  3. Step three: Contact lenders to determine their application process, how long it takes and other requirements.
  4. Step four: Before committing to a lender, make sure you read the fine print regarding added fees, interest rates and payment terms.

Conclusion

Learning how to consolidate student loans involves understanding the difference between federal and private student loans. Student loan consolidation is an optimal way of managing your payments, reducing debt, and experiencing potentially lower interest rates. Those who have concerns about consolidating should contact their servicer or one that they’ve researched for further information.