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    Student Loan Consolidation

    The concept of a consolidation loan involves taking out a loan to pay off all outstanding debts. This leaves the borrower with one single payment, usually at a lower interest rate than before.

    Because the term is variable, monthly payments can be made more manageable by extending the term, this leading to a lower monthly payment.

    Best Student Loan Consolidation Companies 2020

    • SoFi: A leading online vendor of student  consolidation loans, their loans include low APR but face stricter lending criteria including a high credit score and low debt-to-income ratio.
    • College Ave: This lender can be hit or miss in regards to student loan debt consolidation. Their rates often lag behind those of other lenders.
    • LendKey: At one point, this was a top competitor to SoFi. The major benefit is that LendKey works closely with credit unions and other small financial institutions seeking to build long term relationships with college grads.
    • Splash Financial: A fairly new name to the student loan refinance market, this company started by focusing on doctors undergoing residency. The company has since expanded, offering consolidation and refinancing options to all students.
    • Discover This is one of the most widely recognized names in the area of private student debt consolidation and refinancing. Discover offers among the best rates available as well as innovative services to help students build good credit.
    Lender
    APR Rates
    • Variable Rates: 2.99% - 6.74% APR
    • Fixed Rates: 3.99% - 7.74% APR
    • Variable Rates: 4.73% - 11.46% APR
    • Fixed Rates: 1.30% - 10.00% APR

    Should I Consolidate My Student Loans?

    Deciding whether or not to consolidate your student loans largely depends upon your circumstances. 

    Below is a list of the pros and cons 

    Pros: 

    • Single Payment: If your student loans are with multiple loan servicers it means making several payments per month. After consolidation, there will only be a single payment to make.
    • Lower Monthly Payments: By increasing the term of the consolidation loan it can result in lower monthly payments, something which can be very helpful to new grads with a high debt-to-income ratio.
    • Lower Interest Rate: If you have loans with multiple servicers it is likely that each loan carries a slightly different interest rate. Through consolidation, a lower rate can usually be achieved.
    • Loan Discount: Many lenders will offer small discounts on overall debt if an automatic payment is set up and maintained for at least 36 months.

    Cons:

    • Increased Overall Cost: This is especially true for those who have decided on increased loan terms in order to receive lower monthly payments. While the month to month amount is lower the overall cost of the loan increases.
    • No Federal Option For Private Loans: If your student loan was through a private institution it cannot be consolidated through the Federal  Consolidation Programs.
    • Loss Of Borrower Benefits: Most loans have some kind of benefits attached to them to attract customers. Examples could include interest discounts, late payment protection, or principle rebates.

    Federal Vs. Private

    Students have the option of seeking out Federally funded or private institution student loan options.

    While they function more or less the same there are key differences between the two

    Federal Student LoansPrivate Student Loans
    Have a fixed interest rate, meaning rates will not changeHave variable interest rates, meaning rates change with market conditions
    Does not requires a co-signerMost private lending institutions will require a cosigner to guarantee the loan
    Can be subsidized under certain conditions Are not subsidized
    Eligible for the Federal Debt Consolidation Loan programPrivate loans can be refinanced but not consolidated under the Federal Debt Consolidation program
    Temporary payment postponing or interest lowering is available in some cases. In some casesPrivate lender do not typically allow for payment postponing
    Interest rates are usually around 4.45%Interest Rates are closer to 8% 

    Consolidating Federal Student Loans

    1. Create An Account At The Federal Student Aid Website: To apply for a debt consolidation loan a FSA ID must be created. This allows you to log on, submit paperwork, and review the status of your case.
    2. Complete A Debt Consolidation Loan Application: To complete the application you will need to provide your full name, date of birth, Social Security Number, two adult references that have known you for at least 2 years, as well as employment information.
    3. Mail-In Necessary Forms: Pages one through five along with a signed promissory note. Once mailed, the Department of Education will contact you if they have any further questions.

    Once the application has been processed they will send a notice requiring you to finalize your desire to have all outstanding student loans paid off under the Federal program. There is a deadline to respond.

    Consolidating Private Student Loans

    The low rates available to students through the Federal Consolidation Loan Program are not available to those who have a student loan with a private lender. This being said, there is the option of refinancing.

    Refinancing can essentially be thought of as trading one, or many, loans of a specific amount for another loan of the same amount.

    The new loan usually has preferable terms attached to it, such as interest rate and term.

    To make this clear we will go over an example using SoFi, one of the leading student loan consolidation companies.

    1. Decide If Student Loan Refinancing Is Right For You: If you find that monthly payments are too high, or that multiple monthly payments are hard to keep track of, a student loan refinancing may be the best option.
    2. Undergo The Preapproval Process: The pre-approval process for your school loan consolidation can be completed in a matter of minutes. Within two minutes you should know if you have qualified or not.
    3. Select Rate And Term: They offer two rate options, fixed and variable. A fixed-rate means the interest you pay will stay the same over the lifetime of the loan. Variable means it will change with market conditions. Another issue to consider is term length. SoFi offers terms of 5, 7, 10, 15, and 20. The shorter the term the lower the interest rates but higher the monthly payment.
    4. Submit Debt Info Electronically: They will ask for the appropriate details concerning all student loan debt consolidation you wish to undergo. 
    5. Receive Single Monthly Payment: Once the paperwork has been filed, SoFi will pay off your existing student loans, thus consolidating them into a single payment.

    Interest Rates

    It is important to understand how interest rates impact your decision to consolidate or refinance your student loans. As previously mentioned, fixed rates and variable rates differ and what one chooses depends on several factors. 

    If the economy is headed towards a contraction, variable rates may benefit the borrower as decreased economic activity results in lower interest rates. Should the economy be heading for an expansion the opposite is true.

    Contractions and Expansions can be hard to time, so many people prefer a fixed interest rate they are happy with.

    Conclusion

    Undertaking a college loan consolidation or refinancing should be based on a number of factors. Those who have a loan from a private lender will require a decent credit score to qualify for better interest rates than they currently have. Those with a bad credit score should focus on improving their credit school before consolidation.