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
- 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.
- 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 Loans||Private Student Loans|
|Have a fixed interest rate, meaning rates will not change||Have variable interest rates, meaning rates change with market conditions|
|Does not requires a co-signer||Most 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 program||Private 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 cases||Private 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
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- Submit Debt Info Electronically: They will ask for the appropriate details concerning all student loan debt consolidation you wish to undergo.
- 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.
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.
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.