How Student Loan Consolidation Works

FT Contributor  | 

Student loan consolidation is the process of combining multiple student loans into one loan. The loan must be paid until the balance is zero, but the loan terms may be adjusted slightly after consolidation. In most cases, you may decide to consolidate your student loans to make it more convenient when making payments. Consolidation may also be necessary to qualify for certain federal loan repayment programs.

Student loan debt is on the rise. A 2018 report by the Federal Reserve Bank of New York reports that 44.7 million Americans are in student loan debt and it totals $1.47 trillion, more than credit card and auto loan debt. With so many student loans, consolidation can be helpful for borrowers who want to make one payment on their loans each month. In some cases, borrowers may also qualify for better loan terms, such as a lower interest rate on private student loans.

When consolidating, borrowers need to pay attention to initial loan benefits they may lose out on, such as interest rate discounts. While extending the length of the loan through consolidation can lower monthly payments, borrowers are tied into paying their student loans longer. Learning more about the federal and private student loan consolidation process can help you decide if consolidation is right for you.

Federal Student Loan Consolidation

If you have several federal student loans, you can consolidate them through federal student loan consolidation. Most loans that are provided through the federal government are available for consolidation. While you won’t necessary save money by consolidating your federal student loans, it may be necessary so you can qualify for certain loan forgiveness, federal loan protection, or repayment programs.

How to Consolidate Federal Student Loans

You can consolidate your federal student loans for free through the Department of Education. You’ll need to apply using the online form and provide your loan and financial information. If you qualify, the program combines your federal student loans and offers you a fixed interest rate based on the average of the interest rates on your current loans.

There are also private companies that can help you consolidate your loans, but these companies may charge you a fee to complete the process. When you apply for federal student loan consolidation with the Department of Education, you may be contacted by these private companies. However, keep in mind the federal government is not affiliated with these companies.

Private Student Loan Consolidation

A private student loan is backed by a lender other than the federal government. Since these loan providers are private entities, they may or may not offer loan consolidation. Each lender can decide whether loan consolidation is an option for borrowers. While you may have private student loan consolidation options, federal student loan consolidation programs are not available for private loans. These two types of loans cannot be grouped together in one consolidation program.

How to Consolidate Private Student Loans

If you have both private student loans and federal student loans, they usually cannot be consolidated together in one program. However, if you have multiple private student loans, they can usually be refinanced and consolidated together into one loan. To complete this process, you must contact a student loan consolidation company, which may charge you a fee.

To consolidate your private student loans, the company must refinance your loans. Therefore, your financial history and current situation, including your credit score and income, are reviewed before an offer is provided. Your private student loan consolidation offer provides you with one interest rate and monthly loan payment based on your current loan balance, loan terms, and financial history. If you accept the offer, you’re required to make the monthly loan payments until the balance is paid off.

Student Loan Consolidation vs Refinancing

When you refinance your student loans, you’re essentially completing the same process as consolidating them. However, refinancing these loans can provide you with an opportunity to change your interest rate.

If you feel your credit score has improved or your financial history is strong, you may benefit from refinancing your student loans. In these cases, you may qualify for a better interest rate or other more beneficial loan terms that could save you money.

You may want to consider refinancing your student loans if:

  • Your credit score has improved.
  • You have a good employment history.
  • You are currently employed.
  • You have a healthy and steady monthly income.

Before you decide to refinance your student loans, it’s important to ensure it won’t disqualify you from any current benefits you have with your loans. If you’re currently enrolled in a loan repayment assistance or loan forgiveness program with the federal government, refinancing your loans could disqualify you from this program. If you work in the public sector and are currently enrolled in public service forgiveness programs or other income-based repayment programs, refinancing can also disqualify you from these assistance programs.

Whether you decide to refinance or consolidate your loans, it’s important to ensure this action is beneficial for you financially. Making one payment to one lender is convenient and can save you money if you qualify for a lower interest rate or repayment program. However, it’s important that you weigh the pros and cons of consolidating before you agree to loan consolidation terms.


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This post was updated December 4, 2019. It was originally published December 4, 2019.