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Whether you need to consolidate private or federal school loans, this guide walks you through student loan debt consolidation so you can find relief.
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 or more repayment plans 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.
When you’re talking about consolidation, student loans fall into two categories:
For the purposes of consolidation, it doesn’t matter if you have subsidized or unsubsidized 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 use federal consolidation and repayment plans for private student loans.
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 consolidation 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.Back to top
Consolidating federal student loan debt is a two-part process.
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.Back to top
A private student debt consolidation loan works in much the same way as a credit card debt consolidation loan.
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 school loan consolidation for federal loans. There are more benefits than risks by count, but the downsides carry significant weight. Consider your options carefully!
When you consolidate through a federal program, you don’t get a lot of choices.
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.
If you split your consolidation plan into two parts, you have to 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.
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.
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.
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:
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
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 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.Back to top
Article last modified on June 3, 2019. Published by Debt.com, LLC