Student Loan Consolidation
Figuring out how to take out student loans was confusing enough. But now your student loan servicer has brought up consolidation, and you have no idea what they’re talking about.
What is student loan consolidation, anyways? And can it actually save you money? We’ll tackle those questions and more today as we take a closer look at student loan consolidation, refinancing and their alternatives.
What is Student Loan Consolidation?
When you consolidate your student loans, you are taking multiple, smaller loans and putting them all into one larger loan.
This loan is likely to have new terms and interest rates, which may or may not end up being advantageous to you.
How to Consolidate Federal Student Loans
When you consolidate your federal student loans, your new interest rate will be the average of the 2+ rates you are already paying. So if you had a loan at 4.53% and another at 7.08%, your new, consolidated rate would be 5.81% after rounding.
4.53% + 7.08% = 11.51%
11.51% / 2 = 5.81%
Your new loan term — or the amount of time you have to repay your loan — can stretch from 10 years to 30 years.
This may result in lower monthly payments depending on when you consolidate. Even if it does, though, that doesn’t make the loan less expensive. In fact, the opposite can be true as you’re paying interest over a longer period of time.
Is Federal Student Loan Consolidation a Good Idea?
If you want to save money over the life of your loan, consolidation likely isn’t for you. It’s also not for you if you’re looking to lower your overall interest rate.
However, if you desperately need lower monthly payments, consolidation may be a good match for you. For example, if you’re at risk of default, consolidation may be a preferable solution.
Contact your student loan servicer, though, after educating yourself about the different types of federal student loans. There may be a repayment plan or deferment allowance which better suits your situation.
How to Consolidate Private Student Loans
The consolidation of private student loans is more often referenced as ‘refinancing.’ This may be a better term, anyways, as refinancing doesn’t necessarily have to include more than one loan.
When you refinance with a private lender, your creditworthiness and other factors will be taken into account. In the past few years, online lenders have started offering particularly attractive rates to, particularly well-qualified borrowers.
While some of these lenders use a traditional FICO score to screen applicants, there are other lenders — especially marketplace lenders — who will qualify you based on factors such as your education and income potential.
Is Refinancing My Private Student Loan a Good Idea?
Private student loan refinancing can be a good idea under select circumstances.
First, if rates were particularly high when you initially took out your student loans, the market rates at the time of writing are still relatively low.
Refinancing could score you a lower rate. It could also score you a lower monthly payment, but bear in mind that if you make only these new lower monthly payments, you’re likely to pay more over the course of your loan than if you had not refinanced, to begin with.
Another situation where refinancing may help your interest rate is if your credit is better now than it was when you took out your private student loans. In this case, you may be able to get a better offer than what you’re paying now.
Sometimes, you just need to lower your monthly payments. Maybe you lost your job and have to patch together some client work while you’re looking for something more permanent. Maybe you lost a spouse or went through a divorce.
Life happens, and sometimes that means refinancing for lower monthly payments can make sense — even if you’re going to be paying more in interest over the life of the loan.
Can I Consolidate Private and Federal Student Loans Together?
It is rarely, if ever, a good idea to consolidate private and federal student loans together. You will not be able to do so through the federal government; the Department of Education will not accept your private student loans as a part of the consolidation process.
That means to consolidate private and federal student loans together, you’ll have to turn to the private market.
While there are lenders that will take you on, remember that when you refinance your federal student loan on the private market, you’re giving up access to federal programs such as income-driven repayment programs, Public Service Loan Forgiveness, forbearance, extended payment programs and more.
One of the few demographics who could, under the right circumstances, potentially benefit from refinancing on the private market is those who are comfortable doing business with online marketplace lenders.
You must also have a monetizable education and high-income potential given your current career trajectory. Even then, you would have to meticulously run the numbers to ensure taking advantage of an income-driven repayment plan or a forgiveness program wouldn’t be a wiser financial move than turning to these online-only lenders.
Alternatives to Consolidating Student Loans
If you’re considering consolidating your student loans, it’s probably for one of three reasons:
- You want to lower your interest rate.
- You want to lower the dollar amount of your monthly payment.
- Both 1 & 2.
All three are worthy reasons to consider consolidation. However, if you’re trying to lower the dollar amount of your monthly payment on federal loans, you may have better alternatives.
Income-Driven Repayment Plan
Income-driven repayment plans cap your payments at a certain percentage of your discretionary budget. Your discretionary budget is what’s left after necessities like food and housing are covered.
Most federal repayment programs will take a max of 10% of whatever’s leftover, but some will take 15% of this discretionary income.
This can potentially help you lower the amount of your monthly payments without refinancing on the private market.
Do you need lower monthly payments because of financial hardship? Do you see this hardship being temporary? If so, you may want to ask for a deferment. Examples of permissible reasons for deferment include:
- Being a current student or the parent of a current student.
- You’re in the first six months after graduation or the first six months after you stopped attending school.
- Undergoing cancer treatment.
- Going to rehab.
- Unemployment or being unable to find full-time work.
- Serving in the Peace Corps.
- Economic hardship.
- You are on active duty with the military.
- You have separated from the military in the past 13 months.
If the deferment request you put in with your loan servicer is granted, the amount of money you’ll have to pay during the deferment period will vary depending on the type of loan.
Subsidized loans will not have to worry about anything, as the principal payments will be deferred and the federal government will pay the interest charges.
However, if your loan is unsubsidized, you will still be responsible for interest charges. You can elect to let them go until the end of your deferment period, but they will compound upon themselves.
Student Loan Forbearance
If you’re having a hard time financially, whether it’s due to employment issues, medical issues or something else entirely, you can ask your student loan servicer for up to 12 consecutive months of general forbearance.
During this period, you would not have to make principal payments, though interest payments would still be due whether your loan is subsidized or not.
General forbearance can be given out for almost any reason at the discretion of your loan servicer.
However, there’s also such a thing as mandatory forbearance. These are circumstances under which your student loan servicer must grant you forbearance.
They include your payments being 20%+ of your gross income for the past three years and serving in Americorps, among other circumstances.
Should I Consolidate My Student Loans?
Student loan consolidation certainly is one option if you are falling behind on your payments or dissatisfied with your interest rates. But you should consider it as just that: One of the many options that could get you to your goal.
Depending on your personal circumstances, switching repayment plans, asking for deferment or asking for forbearance may match your end goals better, keep you eligible for the benefits federal student loans, and could end up being the smarter financial decision when you crunch the numbers, anyways.