Make Bills Simpler with Loan Consolidation
“The more the merrier” applies to things like cookies, party guests, and puppies – but definitely not student loans. When you find yourself with too many student loans, it can feel like you’re juggling heavy bundles of serious financial consequences. Luckily for you, there’s no need for a circus act when it comes to paying off your education. Loan consolidation makes it possible to take multiple student loans and consolidate them into a single loan.
What Happens in Loan Consolidation
Loan consolidation is when you take multiple federal student loans and combine them into one loan, resulting in a single monthly bill. This option is available to some types of federal loan borrowers. There’s no application fee required by the Department of Education to consolidate your federal student loans into a Direct Consolidation Loan.
Federal Loan Consolidation Requirements
If you’re consolidating your federal student loans, you’ll need to meet the following eligibility requirements:
- Your loans in question must be in a grace period or in repayment
- Your loans to be consolidated can’t include an existing consolidation loan (unless you have an additional eligible loan in the consolidation)
- If a loan to be consolidated is in student loan default, you must either:
- Make satisfactory repayment arrangements on the loan before consolidation, or
- Agree to repay your new consolidation loan under one of the income-driven repayment plans
- If you’re dealing with student loan garnishment, you’ll need to have the wage garnishment order lifted before consolidating
As far as timing goes for eligibility, you’ll be able to consolidate your loans after you leave school, graduate, or drop below half-time enrollment.
Once you’re received your Direct Consolidation Loan, you’ll begin repayment 60 days after disbursement. However, if you decide you want your servicer to process your consolidation application closer to your grace period end date, you may be able to start making payments closer to the end of your grace period. Typically, your loan servicer will keep you informed about your first payment date.
Consolidation for Private Student Loans
Because federal and private student loans are so different, it makes sense that their consolidation options will look different, too. Generally speaking, when people talk about consolidating private student loans, they’re actually talking about refinancing those loans, which is a different process. Consolidation (as it works for federal student loans) is not generally offered for private student loans.Benefits of Consolidation:
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One monthly expense:
When you consolidate applicable loans, you will go from multiple payments to just one. As you can imagine, this can drastically simplify your financial obligations. -
Fixed interest rate:
Even if you had variable-rate loans, consolidating will switch your loans to a fixed interest rate for the life of the loan, which is a weighted average of your combined loans’ interests. The amount may even be lower than your current rate, especially if you had a high interest rate.
For instance, if one loan has a 6.8 percent interest rate and your second is 7.8 percent, your new rate would be 7.3 percent. This could save you money, depending on the debt amount. -
Default recovery:
Even if you’ve defaulted on one or more loans, you can combine them. This can be a feasible way to get out of collections and on track for an income-based repayment plan. -
Potential access to new benefits:
If you’re consolidating loans that aren’t Direct loans, you may gain new access to income-driven repayment plan options and student loan forgiveness options.
The Fine Print — How Combining Student Loans Could Backfire:
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Use one-time opportunity:
You can only consolidate once (unless your last consolidation was more than 10 years ago), so you get one shot to do it right. -
Forfeit benefits:
Once you consolidate, the prior loans and their benefits no longer exist. This is important to consider if you will be giving up special interest rates or possible cancellation eligibility. -
Reset forgiveness credit:
If you have been on a payment plan which may allow for Public Service Loan Forgiveness or Income-Driven Forgiveness you will lose any credit you have already accumulated and start the clock over. -
Pay higher amount:
You may end up paying more over time with a consolidation. This is because the new joined loan extends the repayment term, creating a longer time to collect interest.
Find Out If Consolidation Is Right for You
Consolidation is just one of many solutions to address your student loan debt concerns. And for many Americans with multiple student loan payments, the benefits outweigh the risks. Speak with a Student Loan Advisor for help determining your top priorities and finding the plan that works for you.