Debt from student loans can be stressful, especially if you have many loans to manage. Consolidating your loans is one solution for debt management. So, how does student loan consolidation work, and what should you be aware of? Continue reading this guide to learn what it is, why you might want to consider consolidating your loans, how to consolidate the loans even if you are in default, and the differences between federal and private student loans.
What is Student Loan Consolidation?
Student loan consolidation is the act of combining multiple student loans into one new loan in order to lower the amount of payments you must make each month. This procedure may allow you to reduce your monthly payment and/or interest rate.
Yet, there may be some disadvantages. You may lose some benefits, according to the Department of Education. You may also end up raising your total debt or extending the time it takes to pay off everything.
Federal Student Loan Consolidation:
A Direct Consolidation Loan can be used to consolidate numerous federal loans. This could assist you reduce the number of loan payments you have to make each month as well as your monthly payment by extending the length of your loan. It may also assist you in qualifying for certain repayment or forgiveness schemes.
Private Student Loan Consolidation:
You cannot consolidate private student loans or a combination of federal and private loans through the federal program. Yet, you may be able to combine them with the help of a private lender or a bank.
Private student loan consolidation may not offer the same low interest rates as a federal scheme. Nonetheless, if your credit score has improved, your rate for a new private consolidated loan may still be lower than your prior loan rates. Ensure to keep up with payments on any student credit cards.
Keep in mind that if you consolidate federal and private student loans, you may lose access to federal loan perks such as repayment plans and deferral programs.
Is there a Way to Consolidate my Student Loans?
Indeed, there are ways to consolidate both your federal and private debts, and we will explain each process in detail. Let’s get specific.
How to Consolidate Federal Loans:
Here are some considerations to consider when consolidating federal student loans.
#1. Check to see whether you are eligible
The following are some of the conditions for federal student loan consolidation:
- Your loans must be in repayment right now.
- Your loans cannot have already been combined.
- How do you consolidate when your student loans is in default? If your loan is in default, you must normally have made a set number of consecutive payments or be engaged in an authorized repayment plan.
- You must have graduated, dropped out, or dropped below half-time enrollment.
#2. Choose a repayment plan
You can choose a repayment schedule based on your loan balance or one based on your income. If you choose an income-driven plan, you must next complete an Income-Driven Repayment Plan Request form.
#3. Before submitting the form online, read the terms
Continue making your regular student loan payments until your servicer certifies consolidation is complete.
If your student loans are in default, then you need to consolidate because it is one of several options for getting them back on track. To consolidate your student default loans, you must make three consecutive full, on-time monthly payments on the defaulted loan and agree to participate in an income-driven repayment plan.
How to Consolidate Private Student Loans:
Here are some considerations to consider when combining your loans with a private lender.
#1. Locate a private debt consolidation lender
It’s conceivable that your present lender will provide you with a consolidation option. If this is the case, you have the option of consolidating with the same lender or shopping around for another.
#2. Check to see whether you are eligible
Possible prerequisites for private student loan consolidation may include:
- You are repaying private student debts.
- You have high to outstanding credit.
- You may show proof of income.
If you meet the requirements, you can fill out and submit an application.
#3. Use your loan to pay off existing student loans
If you are approved, you will be able to utilize your new loan to pay off your existing debts. Then you can start paying one monthly payment on the new loan.
Is it Good to Consolidate Student Loans?
Student loan consolidation is generally only possible for federal loans. Refinancing, on the other hand, is available to both federal and private loan borrowers. Consolidation can help cut and simplify monthly payments for borrowers with federal student loans. It’s also a terrific method to get more repayment options and borrower safeguards, rehabilitate a defaulted loan, or otherwise alleviate the stress of debt repayment.
Student loan consolidation may be a good option if you want:
#1. Reduced monthly payments
Consolidating your student loans allows you to stretch the repayment period to up to 30 years, decreasing your monthly payment. But, keep in mind that you will pay more interest on your loan in the long run.
#2. Simplified payments
If you are currently making payments to various servicers for your student loans, consolidation can simplify the process so that you only have to pay off one loan.
#3. More repayment options and borrower protections
Borrowers who consolidate federal loans can select from a variety of income-driven repayment (IDR) options. Furthermore, borrowers who would not normally be eligible for PSLF can qualify by merging their federal loans through a direct consolidation loan.
#4. A different loan servicer
If you’re unhappy with your existing federal student loan servicer, consolidation allows you to select a new one. When you submit your consolidation application, you will be asked to choose a servicer for your new loan.
#5. An alternative to loan rehabilitation
If you currently have delinquent student loans, loan consolidation can help you pay them down provided you agree to repay the new loan through an IDR plan or make three voluntary, on-time, and full monthly payments on a delinquent loan before consolidating it.
Student Loan Consolidation: Advantages and Disadvantages
Before you consolidate or refinance your student loans, consider the advantages and disadvantages.
Advantages of student loan consolidation:
- Simpler bills. Your monthly payments will be simpler and easier to manage with only one loan to worry about.
- Reduced monthly payments. Consolidation might reduce your monthly expense by extending the repayment term or providing you with a reduced interest rate.
- Release a cosigner. Consolidating your debts may also allow you to dismiss a cosigner and assume full responsibility for your obligations.
- Work with a new loan servicer. If you’re unhappy with your existing loan servicer, student loan consolidation allows you to choose a new one.
- Get out of default. If you’ve fallen behind on any student loans default at all, you need to consolidate and a federal loan consolidation can help you get back on track.
- Receive a fixed rate of interest. Consolidating your variable interest rate loans can result in a single, new loan with a fixed interest rate. That means your new payment will be constant over time.
The Disadvantages of Consolidating Your Student Loans:
- A longer repayment period means paying higher interest over time.
- Each loan interest forms part of the combined loan principal.
- Borrower perks such as interest rate discounts, principle rebates, and loan cancellation benefits are no longer available on certain loans.
- You will lose credit for any payments made prior to consolidation toward PSLF or an IDR plan.
- Individual loans cannot be paid off to reduce your monthly payment.
How to Get Approved for Consolidating Your Student Loans
Students who have graduated, dropped below half-time enrollment, or left school are eligible to consolidate their federal student debts. Federal student loan consolidation has no credit restrictions. However, there are some more conditions that must be met before applying for a direct consolidation loan:
- The loans you wish to consolidate must already be in repayment or in the grace period, which lasts six months after you graduate, drop below half-time enrollment, or leave school, depending on the kind of loan.
- In general, if you have already consolidated a loan, you cannot combine it again unless you also consolidate another qualified debt.
- If you make three consecutive monthly payments on the loan prior to consolidation, or agree to repay your new direct consolidation loan under one of several income-related repayment plans, the debts you want to merge cannot be in default.
- To consolidate student default loans that is being collected through wage garnishment or a court order is also not permissible unless the garnishment order is removed or the judgment is annulled.
In contrast, private student loan refinancing requires approval procedures identical to traditional loans. Lenders often require a credit score in the upper 600s, a debt-to-income ratio of less than 50%, and a documented ability to repay the loan to qualify.
How Long Does It Take To Consolidate Student Loans?
It takes roughly 30 minutes to complete the straight consolidation loan application. Once you’ve filed the necessary papers, your loan consolidation should be finished within four to six weeks. When the first payment on the consolidation loan is due, your loan servicer will notify you. After that, if possible, set up autopay so you never miss a payment.
If you haven’t gotten notification that your consolidation is complete, keep making payments on your existing debts until you do. Failure to make a payment might harm your credit and result in late fees.
Alternatives to Student Loan Consolidation
Consolidating student loans is not for everyone. Consider these alternatives if you don’t have a fair to excellent credit score (many private lenders require a score of at least 650) or are struggling to make your present payments.
#1. Deferment
If you are between employment, returning to school, or experiencing financial or physical difficulty, you may be able to put your federal student loans (and interest accrual) on hold by asking for student loan deferral.
#2. Forbearance
Student loan forbearance is similar to deferment, except that you must pay all accrued interest during the forbearance period. Also, you cannot obtain forbearance for more than a year at a time.
#3. Income-driven repayment plans
If you can’t afford your federal student loan payments, you may be able to apply for income-driven repayment plans without first consolidating.
#4. Student loan repayment
If you get behind on your loan payments, you can try contacting your servicer to negotiate new payment conditions.
#5. Maintaining your current plan
If you don’t qualify for private student loan consolidation, don’t want to prolong your payback term, or don’t want to lose the benefits of some federal loans, sticking with your existing repayment plan may make sense. You can always attempt to improve your financial status and qualify for refinancing in the future.
Can my Student Loans be Forgiven if I Consolidate?
If you consolidated your private and federal debts into a single loan from a private lender, the loan is now private and hence ineligible for forgiveness.
How soon can I Consolidate my Student Loans?
In general, you can consolidate if you graduate, quit school, or decrease below half-time enrollment.
Do Student Loans Clear after 7 Years?
If the debt is paid in full, the default will remain on your credit report for seven years after the final payment date, but the balance will be zero. The default will be removed from your credit report if you rehabilitate your debt.
What Credit Score do you need to Consolidate Student Loans?
Buyers who seek to refinance their student loans will most likely need strong or excellent credit. According to Experian, one of the three major credit bureaus, a credit score of 670 is commonly required by lenders to be eligible for student loan refinancing.
To conclude
Consolidating your student loans can help you better manage your monthly loan payments while perhaps lowering your interest rate or payments. However, it may not be suitable for everyone. Before making a decision, it’s a good idea to weigh the advantages and downsides and check into other options for repaying student loans.
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