When talking about student loan consolidation, there are two main types that you should be aware of – private student loan consolidation and federal student loan consolidation. Both processes are often being mixed up. They are in fact quite different.
- Private student loan consolidation, also known as student loan refinancing, is a financial process that you take on by using the services of a private lender. If you have a good credit score, you may be able to qualify for better loan terms and save a significant amount of money with a lower interest rate student loan.
- Federal student loan consolidation is when you take out a student loan through the Department of Education. In order to be eligible for certain federal loan repayment programs, you may need to consolidate. However, federal consolidation will not save you any money or in any way lower the interest rate that you are paying.
The basics of private student loan consolidation (student loan refinancing)
Private student loan consolidation (or student refinancing) is a replacement of several student loans (federal, private or a combination of both) with a new, single private loan. By doing that, if you manage to get a lower interest rate and fees on your brand new private student loan, you will be able to save a significant amount of money. What will ultimately determine your private student loan terms is the state for your credit score, job history, monthly income and educational background. All these factors will determine the interest rate of your private student loan. What you usually need to qualify for a private student loan is a credit score that is in the mid 600s.
The interest rate that you would be able to get with such credit score will vary between 2% and 9%. It is very important to understand that if you decide to refinance your federal loans into a new private loan, you will automatically lose the privileges that federal student loans have. Such federal student loan privileges include interest-free deferment, access to various federal loan forgiveness programs as well as income-driven repayment. If you have made up your mind and you are ready to begin the procedure for your private student loan consolidation, make sure you compare what different private loan lenders are offering you so that you can choose the one that offers you the best loan terms with the lowest interest rate.
Basics of federal student loan consolidation
If you decide to consolidate federal loans, they will be repaid by the government and then the will be replaced by a single consolidation loan. Normally, you are eligible for a federal consolidation loan once you have graduated, left school or if you have dropped below half-time enrollment. To consolidate your federal loans through the Department of Education will not cost you a thing, which is a big advantage compared to private companies that will charge you a certain fee to consolidate your loans.
When consolidating federal loans, the new fixed interest rate that you will get is going to be the weighted average of all your previous rates, all of them rounded up to the next an eighth of 1%. For example, if the average of your previous rates is 6.05%, your new interest rate is going to be 6.15%. You will also get a brand new loan term with a duration of between 10 and 30 years. Normally, your repayment term will start within 2 months from the date your consolidation loan was first disbursed and will then be based on your overall federal student loan balance.
Consolidating federal student loans
According to the website of the Federal Student Aid, it takes up to 30 minutes to apply for a federal student loan consolidation for most borrowers. As part of the application process, you will be required to provide some details about the federal student loans you currently have, and also choose a federal loan repayment plan and services for your new federal consolidation loan. You will need to complete the application process for a federal student loan in just one session, so it would be for the best to do some research prior to starting the federal loan application process. Once you are ready to apply, you can follow these steps:
Visit studentloans.gov website and log in using your Federal Student Aid ID. By clicking the ‘Complete a Consolidation Loan Application Note’ under the consolidation and repayment tab, you will find the application.
- After that, you will need to select the federal loans that you would like to consolidate. You may choose to consolidate a specific loan or choose to consolidate all of them.
- Then you will need to choose a student loan provider. Federal loan providers are private companies that manage federal loans for the Department of Education. You will be able to choose one of four providers for your brand new direct consolidation loan. You will also be able to state with the loan servicer that you have used for your previous federal loans.
- Choose a repayment plan for your brand new federal consolidation loan. With a standard federal loan consolidation repayment plan, depending on your overall federal student loan balance, you will be making equal payments each month for the next 10 to 30 years. You can also choose another repayment plan as you have an option of 6 more repayment plans to choose from, including 4 income-driven repayment plans. Before you start with your federal loan application process, you can try the Federal Student Aid’s repayment estimator in order to choose the best repayment plan for yourself. By using this tool, you will get an idea of the amount of money that you are going to have to pay each month with the different repayment plans. If you have chosen an income-driven repayment plan, you will be required to provide some information regarding your income.
- After you have chosen a repayment plan, complete and submit your federal consolidation loan application.