How to consolidate student loans
Do you feel weighed down by student loan debt? If so, you might consider consolidating or refinancing your loans to reduce your monthly payments. In many cases, this can be a smart financial decision. But before you decide to consolidate or refinance, it pays to take a close look at the pros and cons.
Key points to remember
- Consolidating or refinancing high interest private student loans into one loan with another private lender can lower your monthly payments.
- Due to the coronavirus pandemic, student loan payments, including principal and interest, were automatically suspended on student loans held by the federal government until September 30, 2021.
- If you have federal student loans, another option may be to consolidate them through the government’s direct loan program.
- If you consolidate federal loans into a private loan, you will lose some of the special benefits that federal loans have to offer.
Please note that due to the COVID-19 pandemic, federal student loan payments including main and interest – have been automatically suspended until September 30, 2021.
In addition, the Ministry of Education has stopped collecting in default federal student loans or defaulted loans. Garnishment salaries and any compensation for tax refunds and Social security benefits were also arrested until September 30, 2021.
The suspension of the loan payment began as part of the pandemic response in March 2020 and was instituted by President Trump and the Department of Education. The extended suspension does not apply to private student loans and expires September 30, 2021.
How Does Student Loan Consolidation Work?
There are two ways to consolidate your student loans: through a private lender or through the federal government. Only federal loans are eligible for federal consolidation.
In a private student loan consolidation (often referred to as refinancing), a private lender, such as a bank, pays off your private or federal student loans and gives you a new loan at a new rate and with a new repayment schedule. . Refinancing makes more sense if you have high interest private loans and can get a significantly lower rate or better terms with the new loan.
However, with federal student loans, you have another option, which is to combine them into a new one. direct consolidation loan, through the Federal Direct Lending Program. Your new interest rate will be the weighted average of your previous loans, and you will still qualify for some of the special features of federal loans, as we’ll explain later.
Although you cannot consolidate private loans into a federal loan, if you have both private and federal loans, you can consolidate private loans with a private lender and consolidate federal loans through the government program.
Here is an overview of the main advantages and disadvantages of private and federal loan consolidation.
Pros and Cons of Student Loan Consolidation
Lower monthly payments
You can release a co-signer of the loan
You will have fewer monthly payments to make
Repayment terms can be flexible
You could pay more in the long run
You could lose the benefits of a federal loan
Any existing grace period may disappear
Pros: Lower monthly payments
There are two ways that private loan consolidation can help you lower your monthly loan payments. First, the refinanced loan can carry a better interest rate, which not only means lower payments, but can also save you money over the life of the loan. Many graduates also find that they can get better interest rates because their credit scores have improved since their first loan application.
Another way for a consolidation or private refinance to reduce your monthly payments is to extend the term of your loan. For example, if you refinance a 10-year student loan to a 20-year loan, you will see a dramatic reduction in your monthly payments. But there is also a big caveat to signing a longer loan, as we explain in the following Con.
In the case of a federal loan consolidation, you may be able to reduce your monthly payments if you qualify for one of the income-based repayment plans. These plans set your monthly payments based on what you earn or what you can afford to pay.
Disadvantage: you might pay more in the long run
While a longer term loan can mean lower monthly payments, you could end up paying tens of thousands of dollars more over the life of the loan due to the interest accrued.
Pro: You can release a co-signer of the loan
Another advantage of refinancing your private loans is that you may be eligible to sign the loan on your own. Drop a co-signer, who is usually a parent or other close family member, not only frees them from your debt, but it can also increase their credit rating and allow them to access new lines of credit if they need them. . Federal loans generally do not involve co-signers.
Downside: you could lose the benefits of a federal loan
If you consolidate a federal student loan with a private lender, you will lose the ability to take out an income-based repayment plan. In addition, you will no longer be eligible for the federal loan remission and cancellation programs. These are major reasons to consolidate your federal loans only through the federal program.
Pro: you will have less monthly payments to make
Keeping track of multiple student loan payments, in addition to all of your other bills, can be a hassle. Consolidation will reduce your student loan bills to just one (or two, if you consolidate your private and federal loans separately, as advised). Many private lenders even offer a slightly lower interest rate if you take out a automatic payment plan. This option saves you a small amount of money each month and prevents you from forgetting a payment.
Disadvantage: any existing grace period can disappear
As soon as you take out a refinanced loan from a private lender, you need to start paying it off. With many student loans, you can delay payments while you are still in school or while enrolled in a graduate program. If your current loan is still in its grace period, wait until the end of that grace period before starting the refinancing process.
Advantages: repayment terms can be flexible
When consolidating your loans with a private lender, you can choose how long you want the loan to last and whether it has a fixed rate or floating rate. Choosing a variable rate can be riskier since rates can go up at any time, but it can also cause you to lower the interest rate when you start the loan. Federal consolidation loans carry a fixed rate of interest.
How to consolidate student loans
You can consolidate your student loans with many financial institutions, including your local bank or credit union, as well as lenders who specialize in these types of loans. Some well-known names in the field include Serious, Loan key, and SoFi.
You can find more information on the steps to consolidate your federal loans on the Federal student aid website.