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Student Loan Consolidation

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If you’re trying to protect your credit and reduce your monthly student loan debt payments, you may have considered refinancing or consolidating your loans. Here is how refinancing compares to consolidation, and what consolidating your loans could mean for your financial future.

What is student loan refinancing?

Refinancing can consolidate student loans and make it easier to pay off your debt faster to save money. By refinancing your student loans, you can:

  • Reduce your monthly payments
  • Save money over the life of your loans
  • Consolidate your bills into one payment

The advantages of refinancing student loans can be tremendous. But, there’s a catch. You can’t refinance federal student loans through any federal relief program. When you refinance, you must convert all your federal student loan debt to private.

What is student loan debt consolidation?

student loan debt consolidation

Consolidation refers to the process of rolling multiple debts into a single, simplified repayment schedule. In this case, you combine your school loans into one repayment option that work for your budget. There are several ways to consolidate student debt, depending on the types of loans you have, your budget and your credit.

Consolidating student loan debt: Private vs. federal school loans

When you’re talking about consolidation, student loans fall into two categories:

  1. Private
  2. Federal

For the purposes of consolidation, it doesn’t matter if you have subsidized or unsubsidized federal loans; both consolidate in the same way. However, if you use federal loan consolidation options, those only apply to your government-backed debt. In other words, you can’t use federal consolidation and repayment plans for private student loans.

It’s also important to note that a Federal Direct Consolidation Loan doesn’t consolidate debt in the traditional sense. It generally will not reduce the interest rate applied to your debt. Instead, it makes sure as many of your loans as possible are eligible for federal repayment plans and loan forgiveness.

By contrast, if you consolidate through a private (for profit) lender, you can include both your private and federal school loans. Just be aware that if you use private student loan debt relief options for your federal loans, you lose eligibility for federal relief programs. You can’t use government offered repayment plans or loan forgiveness. You need to consider your options and situation carefully before you covert federal debt to private.

How federal student loan debt consolidation works

Consolidating federal student loan debt is a two-part process.

  1. First you consolidate all your eligible federal loans using a Direct Consolidation Loan; this rolls your debts into a single monthly payment.
    1. Note: If you have older loans under the FFEL program, then you use an FFEL consolidation loan instead.
  2. Next, you enroll in a federal repayment plan. This helps you establish a payment schedule that works for your budget and debt elimination goals. In most cases, you want to choose a hardship-based repayment plan, such as Income-Based Repayment.

If you work in public service as a teacher, nurse, or first responder, using this method of consolidation ensure you are eligible for Public Service Loan Forgiveness.

How private student loan debt consolidation works

A private student debt consolidation loan works in much the same way as a credit card debt consolidation loan.

  1. You apply for a consolidation loan through a private lender and qualify based on your credit score.
  2. You choose a repayment term that gives you monthly payments that work for your budget.
    1. A longer term means lower monthly payments but higher total costs.
    2. A shorter term increases monthly payments but minimizes total interest charges.
  3. The interest rate on the new loan depends on your credit rating.
  4. Once approved, the lender disburses the funds to pay off the existing loans you consolidated.
  5. This leaves only the new, lower interest loan to repay

While the process is the same, it’s important to note that you generally cannot consolidate student loan debt with other personal debt, such as credit cards.

Pros and cons of using private school loan consolidation for federal loans

If you have private student loans to repay, private consolidation can be extremely beneficial. You can simplify your bill payment schedule and (if you have good credit) lower the interest rate on your debt.

The main question is whether you should include federal loans in with a private consolidation plan. Below are some pros and cons of using private student loan consolidation for federal loans. There are more benefits than risks by count, but the downsides carry significant weight. Consider your options carefully!

Pro: You can get a better rate and set your term

When you consolidate through a federal program, you don’t get a lot of choices.

  • The interest rate on the repayment plan is a weighted average of the fixed rates on your existing loans. Whether you have good credit or bad credit, it doesn’t matter; your credit score plays no role in determining your rate.
  • The loan term (length of your loan) depends on the repayment plan. Terms range from 10 years up to 30 years, depending on the repayment plan you choose. Most hardship-based repayment plans have 25-year terms.

Going through a private lender means you can choose your term and get a rate based on your credit score. An excellent credit score can be a good reason to go private.

Pro: You only have one payment to worry about

If you split your consolidation plan into two parts, you must remember to cover both bill payments. Although two bills are probably much easier than paying your loans individually, it’s still not as simple as one payment.

Pro: Customer service may be better with private loan servicers

Federal student loan servicers aren’t always known to provide the best service to borrowers. In fact, a recent report in Forbes revealed over half of the CFPB student loan complaints (54%) relate to federal servicing.

That’s not to say private loan servicers don’t have customer service issues. However, with private servicing, you can choose your lender based on research like customer service reviews. You usually don’t get that luxury with federal programs.

So, for example, you might want to avoid Navient because they account for almost one quarter CFPB complaints and face a CFPB lawsuit. However, if your repayment gets assigned to Navient, there’s little you can do to change servicers.

Pro: You don’t have to worry about annual recertification

Once you qualify for a private consolidation loan, you’re set. You have the same fixed payments to cover unless you choose to refinance down the road.

On the other hand, if you consolidate federal loans and use a hardship-based repayment plan, you must recertify annually. Basically, you must recertify that you qualify for hardship based on your Adjusted Gross Income and family size.

Annual recertification can be a pain, especially if your loan servicer doesn’t remind you. If you don’t recertify, you can get dropped from the program. So, you have to know when your recertification date is and be proactive about applying each year.

Con: You no longer qualify for loan forgiveness

If you work in public service, there’s good reason to avoid private consolidation. Any debts you convert from federal to private will never qualify for loan forgiveness. You must use a hardship-based federal repayment plan and make payments for 10 years to qualify for PSLF.

This makes private consolidation a less attractive option for:

  1. Teachers
  2. Nurses and medical professionals
  3. Firefighters
  4. Police officers
  5. EMTs
  6. Military

If you work in the public sector in any of these positions, consider private consolidation carefully! Always weigh the total cost of repayment on private vs. federal before you decide which path to take.

Con: If you run into trouble, you can’t use hardship-based repayment plans

Hardship-based repayment plans are good if you have trouble making student loan payments work in your budget. If you struggle to make your payments each month, these plans match your payments to your income:

Private consolidation loans don’t care about your financial state. Monthly payments depend on the term you choose. The only way to lower your payments would be to modify your consolidation loan to extend the term.

Even if you have a steady income and can afford the payments now, there’s a risk that your situation can change. If you lose your job or run into trouble, there’s no going back to use federal hardship-based repayment plans.

Questions from readers

Consolidating student loans with other debt

Question: Can I consolidate my student loan debt with personal debt such as credit cards and car loans?

Aaron in Virginia

Andrew Pentis, certified student loan counselor at Student Loan Hero, responds…

Since you have student loans, you’re probably already aware of the benefits of refinancing. You could lower your interest rate, switch lenders, and enjoy a simpler repayment.

Student loan refinancing also allows you to consolidate your debt — but only your student loan debt. On the other hand, there is a way to consolidate many different types of debt. Just like student loan refinancing, it requires creating a new loan in your debt’s place.

Pros of debt consolidation with a personal loan

You can use a personal loan. Apply the amount you borrow to student loans, credit cards, auto repayments, or other debt. Then you’d have the simplest possible repayment — just one loan with one creditor, instead of a handful of them.

You would shop for a personal loan the same way you’d compare other financial products, seeking the best terms from reputable lenders. A strong credit score and a stable income, either from you or a cosigner, can help you qualify for advertised rates.

But just because you can consolidate all your debt via a personal loan doesn’t mean you necessarily should. It could make for a significantly more expensive repayment. After all, student loan APRs usually beat those of personal loans.

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Cons of debt consolidation with a personal loan

Say, for example, you have federal student loans with an average interest rate of about 6 percent and credit card debt with a summed interest rate of closer to 20 percent. Unless you qualify for a personal loan with a rate below 6 percent — perhaps with the help of a cosigner — you will end up paying more in student loan interest, even if you pay less on your plastic.

For the most potential savings, you’ll want to lower the rate of each of your debt types. In an ideal world, you would decrease your student loan debt cost by refinancing to a sub-6 percent rate. Then you’d shrink your credit card rates well below 20 percent, using a personal loan or a balance-transfer card with a zero-percent introductory rate (and no annual fee).

If you’re aiming to consolidate for the sake of simplicity but don’t have at least average credit, consider seeking debt relief assistance instead.

Keep your credit score in mind

If you elect to handle each of your loans separately and on your own, keep in mind the potential effects on your credit report. It’s best to apply for one loan at a time and to make those applications within 30 days of each other to minimize the effect on your credit score [1].

Alternatively, your score could increase if you first consolidate your credit card debt before applying to refinance your student loans. That’s because a lower monthly payment to your credit card issuer could improve your cash flow and lower your debt-to-income ratio [2] in the eyes of your potential student loan lender.

Dealing with more than one kind of debt is difficult. But before rushing to consolidate all your debt, ensure it will make your repayment easier — and more cost-effective. Otherwise, consolidation could be a step in the wrong direction.

Crushed by student loan debt and worried you’ll never pay it off? There is help available.

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Who can and can’t consolidate

Question: My girlfriend and I both have lots of student loans. We Googled “student loan consolidation” and got some sketchy-looking websites. But we’re desperate, so we entered some info into some fields. They said she could get her loans consolidated but mine couldn’t be. Is this for real?
— Bill in Iowa

Howard Dvorkin CPA answers…

After getting some information from you, Bill, I figured out the discrepancy: Your girlfriend took out government loans, while you have a substantial number of private loans. Why does that matter? I made this video to explain the differences…

How to save money on those hefty student loans

For more on the differences between private and government student loans, consult our in-depth advice at Federal vs. Private Student Loans. The news isn’t all bad for you, Bill: You have both kinds of loans. You and your girlfriend can take advantage of several federally mandated programs. As you’ve experienced, however, some of the businesses aren’t exactly confidence-inducing.

Think about it this way: You can do your own taxes, or hire an accountant or tax-preparation firm to do it for you. That’s very similar to how student loan consolidation works. You can do it yourself — and shows you how in Do-It-Yourself Student Loan Consolidation — but that can be overwhelming.

The federal government offers various programs depending on your circumstances. The businesses that help you through the process charge you a fee, but the ethical ones never charge in advance, and they never charge more than a fraction of what you’re saving. How do you know you’re dealing with one of those ethical businesses? That’s what is for.

We partner with companies that offer all sorts of debt-related services, and they must abide by our Code of Ethics. When you call us at , one of our experts matches you with a company best suited to help you. It’s worth the call, because while the options can be complicated to navigate, the savings can be huge.


How Much Could You Save?

Just tell us how much you owe, in total, and we’ll estimate your new consolidated monthly payment.