There are two types of student loan consolidation: federal and private. Private consolidation is often referred to as refinancing. These processes are often confused, but they’re very different. Here’s how:
- Federal student loan consolidation is a logistical move you do through the Department of Education. You may need to consolidate to be eligible for some federal loan repayment programs, but federal consolidation won’t lower your interest rate or save you money.
- Student loan refinancing, which is also called private student loan consolidation, is a financial move you do through a private lender. If you qualify based on factors including your credit score, you can save money by getting a lower interest rate.
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Federal student loan consolidation basics
When you consolidate federal loans, the government pays them off and replaces them with a direct consolidation loan. You’re generally eligible once you graduate, leave school or drop below half-time enrollment. Consolidating your federal loans through the Department of Education is free; steer clear of companies that charge fees to consolidate them for you.
When you consolidate federal loans, your new fixed interest rate will be the weighted average of your previous rates, rounded up to the next ⅛ of 1%. So, for instance: If the average comes to 6.15%, your new interest rate will be 6.25%.
Additionally, you’ll get a new loan term ranging from 10 to 30 years. Your repayment term will generally start within 60 days of when your consolidation loan is first disbursed and will be based on your total federal student loan balance, among other factors; click on the link below for more details.
- You can access repayment plans and forgiveness programs you wouldn’t qualify for otherwise
- It’s one path out of default
- It may simplify your student loan payments
- You’ll likely end up paying more in interest
- Any progress you’ve made toward federal loan forgiveness will be erased
- You could lose access to certain repayment plans and forgiveness programs
How to consolidate federal student loans
Applying for consolidation takes most borrowers less than 30 minutes, according to the Federal Student Aid website. As part of the process, you’ll need to provide details about your existing federal student loans, and choose a federal loan servicer and repayment plan for your new consolidation loan.
You have to complete the application in a single session, so do your research before you start. When you’re ready, go to studentloans.gov, log in, and follow these steps to apply:
If you choose an income-driven plan, you’ll be asked to provide income information on the application by granting access to your IRS tax information. You can opt out, but you’ll have to submit a copy of your most recent federal tax return directly to your loan servicer after you finish the consolidation application.
After you review, sign and submit your application, continue making payments on your existing federal loans until your application has been processed. If you have problems with or questions about any part of the application, you can call Federal Student Aid’s Loan Consolidation Information Call Center at 1-800-557-7392.
There are major benefits and drawbacks of federal consolidation; it’s important to understand both because consolidation can’t be undone.
Student loan refinancing basics
Private student loan consolidation, or refinancing, means replacing multiple student loans — private, federal or a combination of the two — with a single, new, private loan. You’ll save money if your new loan has a lower interest rate.
Your financial history — including your credit score, income, job history and educational background — will dictate your new interest rate when you refinance. You typically need a credit score at least in the mid-600s to qualify, and rates range from around 2% to more than 9%.
It’s important to note that when you refinance federal loans into a private loan, you’ll lose protections specific to federal loans. Those include interest-free deferment on subsidized federal loans, and access to income-driven repayment plans and federal loan forgiveness programs.
If you’re ready to get started, compare refinance lenders to make sure you’re getting the lowest possible rate.
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