If you have more than one loan with different interest rates you can consider consolidating your loans at one interest rate and into one monthly payment. Many times there are advantages to doing this, just be sure to watch the interest rate. Sometimes borrowers end up consolidating at slightly higher total interest rate and end up paying more over the life of the loan because they receive a lower monthly payment, which looks good to them in the moment.
If you have a particularly high interest rate, you may also consider refinancing the loans at a lower interest rate to save money over the life of the loan. Refinancing often requires as much paperwork and due diligence as the first time you applied for the loan, so be sure you’re prepared beforehand.
Consolidating Federal and Private Student Loans
Federal and private student loans cannot be consolidated through the federal Direct Loan consolidation program. It may be possible to refinance federal and private student loans through private lenders. To consolidate both your federal and private student loans, you will be required to refinance with a private lender by applying for a new loan. After approval, the private student loan lender will pay off your original loans and provide you details of your new loan that will include a new interest rate and terms. This means you have refinanced your student loans or consolidated your federal and private loans through a refinance.
The Advantages of Student Loan Consolidation or Refinancing
The advantages of consolidation can be as simple as one monthly payment as opposed to many. Additionally, you may qualify for a lower interest rate lowering the monthly payments and reduce the time to pay off the loan cutting the total interest you will pay over the life of the loan.
Refinancing your federal student loans into a private loan may remove some federal student loan benefits. Consider whether or not the federal student loan benefits, such as Public Service Loan Forgiveness Program (PSLFP) does not apply to you. The PSLF program is a benefit for those who plan or is working in public service.
Additionally, federal loan repayment plans can be a benefit for borrowers facing financial distress. Federal student loans can quality for PAYE (Pay As You Earn) and IBR (Income=Based Repayment) programs that give borrowers reduced monthly payments based on financial hardships. However, if your income is beyond a specific threshold you won’t qualify. Reducing your monthly payments can increase the cost of the loans through accumulated interest.
Many private student loan consolidation lenders offer their own benefits and should be considered when deciding to refinance or consolidate.
Consolidation may not be the right option for every borrower but can be the right decisions for others.