What is private student loan consolidation?
Private student loan consolidation is the process of rolling multiple private student loan debts into a single monthly payment with a lower interest rate. Doing this typically provides three benefits:
- You only have to make one payment for the loans you consolidate
- You may qualify for a reduced interest rate to help you save money
- The total monthly payment amount is reduced to make it easier to manage the debt
You consolidate using a private student debt consolidation loan. This is a new loan issued by a private student loan servicer.
How does private debt consolidation work?
- You apply for student loan consolidation with a private loan servicer such as your financial institution or a lending company that specializes in student debt.
- You will be assessed based on:
- Your credit
- The total amount of debt you wish
- The current status of your loans (i.e. are they in default or collections)
- How much other debt you currently hold
- Once approved, the servicer issues the loan at a new interest rate that’s based on your credit score.
- The term of the loan is up for negotiation between you and the servicer. Generally, the longer you set the term, the lower your monthly payments will be.
- The funds are then disbursed to your original loan servicers – i.e. the funds from the new loan are used to pay off the balances your other loans in-full.
- This leaves only the new loan to repay. The payments are typically fixed, making it easier to manage your debt so you can eliminate it without any issues.
When is private loan consolidation beneficial?
This type of debt consolidation is most beneficial when you have multiple private student loans that you’re making payments on each month. It provides even greater benefits if your credit score has improved since you took out your original loans. In this case, the interest rate on the new loan may be significantly lower that the rates applied to your existing debts. As a result, you can reduce your monthly payments even further and save money over the life of your debts by reducing total interest charges.
Another advantage is that you can use a new loan to quickly eliminate debts that have lapsed into collections. You pay off the collection accounts in-full, getting the collectors off your back and bringing the debt current.
Can I consolidate federal student loan debt, too?
There is no restriction on private student debt consolidation loans that your student loans must be private. But just because you CAN consolidate your federal student loans with the private loans, it doesn’t mean you SHOULD.
Consolidating federal student loan debt with a private debt consolidation loan makes those loans ineligible for income-driven repayment plans like Income Based Repayment and Pay As You Earn. You also lose all eligibility for Public Service Loan Forgiveness.
A better option may be to use the private loan consolidation for your private debts and use a Federal Direction Consolidation Loan for your federal student loan debt.