Student loan debt is a challenge to manage for some borrowers, particularly those who have several outstanding loans and a significant amount owed. Fortunately, there are two relatively simple strategies for handling student loan debt for the long term.
The first is federal student loan consolidation, which is the process of combining several federal student loans (those funded by the Department of Education) into a single, easy-to-manage loan. Loan consolidation may offer the benefit of a lower monthly payment, extended repayment terms, and potential forgiveness under certain federal loan programs.
Another option for managing student loan debt is refinancing and consolidating with a private lender. Through a refinance, a borrower works with a private student loan lender to take out a new private loan, paying off several federal or private loans in one transaction. Student loan refinancing may result in a lower monthly payment, a lower total interest rate, or both.
It is important to understand the difference between the two processes, and how each can impact your overall student loan picture. If you have asked the question, should i consolidate my student loans, then read on to get a quick breakdown of each type of consolidation and when to consolidate student loans.
How Federal Student Loan Consolidation Works
A federal student loan consolidation gives borrowers the opportunity to combine multiple federal education loans into a single loan, directly through the Department of Education. Borrowers can select which federal student loans they want to include in the process. Private student loans, however, are not eligible for federal student loan consolidation.
One of the benefits of consolidating student loans with the federal government is the potential to streamline multiple loans into a single debt obligation. Borrowers also have the benefit of extending repayment terms and lowering their monthly payment through an income-based repayment plan.
The process of a federal student loan consolidation is straightforward as it is completed through StudentLoans.gov. Borrowers do not need an outside lender or company to help with a federal student loan consolidation, and there is no fee to complete the process.
Once an application is submitted online (or via paper application), the federal student loan servicer selected by the borrower provides information on the new consolidated loan. Repayment is made to that servicer from that point forward.
Borrowers do not have to have a strong credit history to qualify for a federal student loan consolidation. However, it is required that borrowers are in good standing with their current federal student loans before a consolidation can be approved. If you are behind on your federal student loans, you might be asked to make three on-time payments before consolidating; or you might be asked to enter into an income-based repayment plan.
Should You Consolidate Your Federal Loans?
Consolidation is best suited to borrowers who struggle to keep up with multiple federal student loan payments each month, or those who want to participate in an income-based repayment program. Loan consolidation may make it easier to manage student loan repayment because there are inherent benefits to federal student loans.
These include the option for deferment, forbearance, and forgiveness under certain circumstances. A federal student loan consolidation does not lower the total interest rate on loans, however, and therefore, borrowers who have a desire to reduce the cost of borrowing may find a better fit with a student loan refinance with a private lender.
Consolidating and Refinancing Your Student Loans
Consolidating, or refinancing, student loans with a private lender differs from federal student loan consolidation. The Department of Education is not involved in the process, but instead, the borrower selects a private student loan lender with which to consolidate either private or federal loans.
Private student loan refinance lenders require borrowers to submit an application which may include proof of income or employment, credit history, and credit score. Individuals with strong financial track records are most likely to qualify for a private student loan refinance.
The benefits of refinancing federal or private student loans as opposed to consolidating federal student loans include potentially lowering the interest rate and therefore the total cost of borrowing. Some borrowers may also have the option of extending repayment with a private student loan lender for several years, creating a lower burden on cash flow each month.
However, it is important to know that private lenders have more stringent credit requirements than what a federal student loan consolidation requires. This means not everyone will qualify.
Should You Refinance Your Student Loans?
Refinancing your student loans, as opposed to consolidating, may be beneficial for borrowers who can drastically lower their interest rate across most or all of their education loans. Borrowers with federal or other private student loans who refinance with a new private lender may have options for a variable or fixed interest rate, which can be far lower than comparable federal student loan options.
However, in many cases, refinancing to a private lender takes away the benefits of federal student loans, including income-based repayment plans, deferment and forbearance, and eligibility for forgiveness of loan balances in the future. It is also essential to recognize that not all borrowers qualify for refinancing with a private student loan lender, and a cosigner may be needed to get approved.