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What you need to know about student loan consolidation


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Interested in consolidating your private or federal student loans? Discover the advantages and disadvantages of this financial operation. (Shutterstock)

Student loan consolidation is the combining of multiple student loans into one loan. When you apply for student loan consolidation, you receive a new interest rate. If the rate is lower than your original average interest rate, you can save money.

Two types of student loan consolidation are possible: direct consolidation loans for federal loans and a private refinance loan (which combines federal loans, private loans, or a combination of the two into a single private loan).

Keep reading to learn more about how student loan consolidation works for federal and private student loans.

Consolidating private student loans is also called refinancing. You can learn more about refinancing student loans by visiting Credible and comparing rates from several private student lenders.

How to Consolidate Federal Student Loans

If you have multiple federal student loans, you can consolidate them into a new federal student loan called a direct consolidation loan.

Here are the steps you will typically need to take to consolidate federal student loans:

  1. Choose the loans you want to consolidate. You may decide not to consolidate all of your federal student loans. Choose the ones you want to consolidate before applying.
  2. Complete the Federal Direct Consolidation Loan Application and Promissory Note. By completing this free application, you confirm the loans you wish to consolidate and agree to repay the new direct consolidation loan.
  3. Make payments. Once you complete the consolidation process, you will only have one loan payment to make each month instead of several.

Federal consolidation student loans is quite simple and quick. You need to complete the whole process in one online session, which usually takes less than 30 minutes.

Requirements to Consolidate Federal Student Loans

You must meet certain requirements if you wish to consolidate your federal student loans, such as:

  • The loans you consolidate must be federal student loans.
  • Loans must be in repayment or in grace period.
  • If you have an existing consolidation loan, you must include an additional eligible loan in the consolidation (some exceptions apply).
  • If the loan is in default, you must make satisfactory repayment arrangements (three consecutive monthly installments) or agree to repay your new direct consolidation loan under certain repayment plans.
  • A wage garnishment order should be lifted, if it is in place for a delinquent loan.

When Should You Consider Consolidating Federal Student Loans

One of the main advantages of consolidating federal student loans is to simplify the repayment process. When you consolidate multiple loans into one loan, you only have to make one payment per month and can easily see how much you owe in total.

But consolidation is not always the most logical. It should be noted that if you have outstanding interest on existing federal student loans, when you consolidate them, that interest will be added to your balance and may increase. Keep in mind that you can also lose your progress towards canceling your student loan if you made payments under an income-driven repayment plan.

Consolidating federal loans into private loans means losing access to federal benefits, like student loan forgiveness programs and income-based repayment plans, so it’s important to carefully consider your options if you decide to consolidate federal loans into private loans.

Whether or not to consolidate federal student loans depends on your preferences and financial goals.

If you decide to refinance, you can easily compare prequalified rates from several lenders using Credible.

How to consolidate private student loans (also called refinance)

You cannot consolidate private student loans with a federal direct consolidation loan – but many private student loan issuers offer consolidation, which is often called refinancing. Here are the steps you’ll typically take to consolidate private student loans (or a mix of federal and private loans or only federal loans):

  1. Review your credit score. If your credit score is higher than when you originally applied for your private student loans, you may qualify for a better interest rate, which can save you money on interest payments.
  2. Compare the prices. Check out a few different lenders to see who can offer you the best rates. The lower the interest rate you get, the more money you can save. You can prequalify with a soft credit check to get an idea of ​​the types of rates you qualify for.
  3. Choose terms. Chances are, you can choose between several different repayment terms. The longer terms you choose, the lower your monthly payments will be, but the more interest you will pay.
  4. Gather the required documents. With private student loan consolidation, you will typically need to submit supporting documents to complete the application process, such as tax forms, pay stubs, or W-2 forms. You will also need to provide a repayment statement that tells the lender exactly how much of your current loan balance the new loan will need to repay.
  5. Submit your application. Apply for the loan you have chosen and wait to hear from the lender. If you are approved, the lender will pay off your existing student loans. But be sure to keep making payments on your loans until you get confirmation that they’ve been paid in full.

Requirements to Consolidate Private Student Loans

Private lenders have different consolidation requirements than the federal government. Although all lenders have unique requirements, you may encounter the following issues:

  • Have a certain credit score
  • Apply with a co-signer if your credit score is low
  • Provide supporting documents
  • earn some income

When Should You Consider Consolidating Your Private Student Loans

Consolidating private student loans can make a lot of sense if you can get a lower interest rate. This way you can streamline the repayment process (which is very useful if you have loans from multiple private lenders) and potentially save money on interest.

If you think of refinancing federal loans into a private loan, it is possible but not always the best decision to make. Remember that you lose access to federal benefits when you do this.

Carefully compare all your options and do your research to make sure private student loan consolidation is right for your unique situation.

To start refinancing your student loans, visit Credible and compare prequalified rates from several lenders.