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If you have several student loans, each with its own interest rate, loan terms, and servicer, you might consider consolidating your federal and private student loans. Consolidating your student loans means you pay off your old loans and replace them with a new loan.
As a result, you have one monthly payment, one servicer, and one interest rate. However, there are drawbacks to consolidating federal student loans into a private loan, as you’ll potentially lose access to the benefits and protections of federal loans.
Key Takeaways
- Consolidating your student loans can simplify repayment by replacing multiple monthly payments with a single one.
- Private lenders may offer higher loan maximums compared to their federal counterparts, but private loans often charge a higher interest rate.
- Generally, you’ll only want to consolidate private student loans if you know you’ll get better loan terms.
- However, consolidating federal loans into a private loan can cause you to lose federal benefits and protections of federal loans.
Understanding the Difference Between Federal and Private Student Loans
Federal student loans are funded by the United States government and offer borrowers a fixed interest rate that is typically lower than most private student loans. Also, federal loans don’t require a credit check or a co-signer. However, you must meet a few eligibility requirements to take out a federal student loan, including:
- You must be a U.S. citizen or eligible noncitizen
- Must demonstrate financial need
- Be enrolled or accepted for enrollment as a regular student in an eligible degree or certificate program
If you meet these requirements, you may qualify for federal student aid, including federal loans.
Private student loans are provided by financial institutions, banks, or credit unions. Anyone can take out a private student loan provided they meet the lender’s criteria for approval, which might include meeting a minimum credit score and income threshold. If you don’t meet the requirements, the lender may ask you to get a co-signer.
You may qualify for more funding with a private lender, but you may pay a higher interest rate. Also, some private loans offer fixed interest rates, while others charge a variable rate, which means your interest costs and monthly payments can increase or decrease. Additionally, you won’t get the same protections and repayment options that come with federal student loans.
With private student loans, repayment may begin while you’re still in school, whereas repayment on federal loans is deferred until after you graduate, drop below half-time enrollment, or leave school.
Tip
If you’re struggling to manage multiple student loan payments, consolidation might be worth considering.
Federal Student Loan Consolidation
If you have multiple federal student loans, you can consolidate them into a direct consolidation loan. While this might lower your monthly payment and simplify repayment, your interest rate would remain the same.
You can consolidate most federal loans, including direct loans and Federal Family Education Loans (FFELs). You can apply for free through the Federal Student Aid website. If approved, your loans will be combined into one loan with a single monthly payment. The fixed interest rate on the new loan will replace any variable interest rates on your original loans.
When you consolidate, any outstanding unpaid interest gets rolled into the new loan’s principal balance. Repaying the consolidated loan using the standard or graduated repayment plans can take longer to repay, ranging from 10 to 30 years, depending on the amount borrowed. As a result, it could cost you more in total interest in the long term.
Private Student Loan Consolidation
If you have multiple private student loans, you can explore consolidating them into a single loan with a different private lender. However, you cannot consolidate private student loans using a federal direct consolidation loan.
Be sure to shop around and compare lenders to find better terms than your current loans. Next, complete and submit an application. The lender will then run a credit check to determine your creditworthiness. If approved, your lender will issue a new loan and use the funds to pay off your outstanding loans. In the future, you’ll send the monthly payments to your new lender.
Be aware that your credit history and credit score will significantly impact your interest rate on the new loan. As a result, if you have poor credit, the lender may charge you a higher interest rate than your current loan.
Consolidating Federal Student Loans Into a Private Consolidation Loan
You can consolidate your federal student loans into a new loan under a private lender, but there can be some major disadvantages. You will lose the benefits and protections provided by federal student loans, including
Additionally, your new loan may have a higher interest rate and a longer repayment term, which could increase the overall cost of the loan.
Should You Consider Refinancing Instead?
A direct consolidation loan can offer many benefits if you have multiple federal loans and want to simplify your monthly payments or take advantage of federal benefits and protections. However, if you have private loans and want to lower your interest rate, reduce your monthly payment, or pay off your loans earlier, you might consider refinancing through a private lender.
The Bottom Line
Student loan consolidation offers plenty of benefits, but you must weigh the benefits against the potential costs to decide whether it’s right for you. If you have federal student loans, a direct consolidation loan might work best.
However, you might find refinancing your student loans through a private lender offers better terms, especially if you only have private loans. Before applying for a loan, check your credit score and look for ways to improve it if your credit history is less than perfect. Boosting your credit score can help you get approved for a consolidation loan at a lower interest rate.
