What do you think of when someone says the word “consolidating?” If you’re like most people, your first thought is that consolidating is a good thing. You might be thinking about how it would feel to have one monthly payment rather than multiple payments each month or how much money you could save by refinancing rates on your loans. But before we get too excited, let’s consider whether student loan consolidation (or any consolidation for that matter) is right for you in the first place.
What is a student loan consolidation?
Loan consolidation combines multiple federal student loans into one. The new loan has a single balance and usually includes up to ten loans.
The interest rate is the average of all the actual rates, rounded to the nearest one-eighth of one percent. Federal student loans have fixed interest rates which Congress sets along with other terms that cannot be changed or negotiated for private loans.
This can lower your monthly payment if you have multiple federal student loans with variable rates because you only make payments on one consolidated loan instead of several. Consolidating may also mean paying less in total since there’s typically an origination fee associated with taking out a new loan when consolidating older ones.
In addition, borrowers who consolidate their debts often become eligible for repayment plan options such as extended repayment or income-based repayment that could lower monthly payments.
What are the different types of consolidation?
Federal Student Loan Consolidation
A federal student loan consolidation is your best bet. Refinancing means getting a new loan with better terms (a lower interest rate). If you refinance, then that old debt disappears, and it’s like you never had that debt in the first place.
However, when you consolidate student loans, you’re simply putting them into a new loan. There’s no change to the repayment term or amount of money owed, and your interest rate will not be affected either. However, your monthly payment may be lower because all those loans get rolled up into one enormous debt that suddenly seems more manageable.
Private Student Loan Consolidation
Private loan consolidation is a unique financial tool that has gained momentum in recent years. It can help consumers consolidate their student loan debt into one monthly payment, lower the interest rate on current loans, free up cash for other uses, or pay off other debts faster.
Several companies offer this kind of technology; however, there are also potential pitfalls in consolidating student loans.
Consolidating Student Loans With IBR or PAYE Programs
The federal government offers two income-based repayments (IBR) programs for students who have high levels of debt relative to their income level: Income-Based Repayment and Pay As You Earn. Both are based on your discretionary income, the difference between your income and 150% of the poverty line.
The IBR program requires that at least 15% be applied to any interest in repayment, while PAYE pays all interest on subsidized loans during the loan term. Therefore, the better option depends upon whether or not you expect high levels of future discretionary income or low levels of discretionary income.
Direct Consolidation Loan
A federal direct consolidation loan is available to all federal student loan borrowers. The program allows loans from multiple lenders to be combined into one convenient monthly payment, which can lower the borrower’s monthly expenses and make it easier to manage their finances.
Public Service Loan Forgiveness
(PSLF) is one of the best student loan forgiveness options, but it’s also complicated. To make sure you qualify for PSLF and ensure that your loans are on track, consolidate your federal student loans into a new Direct Consolidation Loan.
Why should you consolidate your student loans?
There are several reasons to consolidate your student loans. First, consolidating your federal and private student loans will simplify the repayment process for you by replacing multiple debts with one debt.
Second, many lenders offer unique benefits or rewards that apply only when you have more than one loan with them. Lastly, consolidation can help some borrowers get on an income-driven plan like PAYE (Pay As You Earn).
How to consolidate your student loans
This is a topic that many students have questions about. The main reason for this is that there are so many different repayment options available to them. Therefore, they want to determine which one will be the best fit before finalizing their student loan consolidation decision. In regards to what borrower benefits from consolidating their loans, here’s an overview of how it works:
Borrowers who choose to consolidate will have all of their loans combined at a new repayment term. However, this is not automatically the case, as borrowers first need to decide if they want a standard or extended plan for how long it will take them to repay what they owe. The majority of students opt for the latter because an extra repayment term will help them manage their student loan debt.
It’s also important to know that borrowers can select the option of having a fixed or variable interest rate after they move forward with consolidating their loans. Most students go for whichever is lower, but some may choose otherwise depending on what makes more financial sense.
The last step for borrowers regarding their student loan consolidation is deciding if they want a standard or graduated repayment plan. Like the extended option, this one has an impact on how long it will take them to repay what they owe and comes down to personal preference.
Those that go with the former decide to pay the same fixed amount every month for a set period, whereas those that go with the latter will pay less at first and then increase their monthly payments after they graduate.
What are the advantages of consolidating your student loans?
The first advantage of student loan consolidation is that you’ll have a single payment every month instead of multiple charges. This will help keep your budget organized and allow for easier planning when it comes time to pay bills or buy groceries.
Most people don’t want their income going towards 20 different loans scattered throughout banks across America because it can be a hassle to manage this kind of thing on top of everything else life throws at us from time to time, so consolidating these loans makes sense in some cases.
With a consolidated loan, you can get your interest rate reduced as much as 0.25% depending on the lender and your current financial standing, which is enough to make or break whether consolidating makes sense for somebody who’s struggling to keep up with their payments every month because of this high-interest rate that seems like it will never go away despite how long they’ve been paying already.
Many lenders offer special incentives such as principal rebates if certain milestones are reached within a set period during repayment after consolidation has taken place. This allows borrowers the chance to improve upon their credit score over time by making timely repayments each month without fail.
Benefits of debt consolidation include lower interest rates, payment plan flexibility, and loan consolidation applications that can be processed by mail or online. In addition, the process is not complicated but does take time to complete.
What are the disadvantages of consolidating your student loans?
The disadvantages of student loan consolidation include a longer repayment term and the loss of certain borrower protections. For example, when your loans are spread out across multiple lenders, you have more flexibility in choosing an income-driven repayment plan that best suits your financial situation.
If you consolidate, then one option might be to apply for this kind of program. Still, it will only take effect once all existing debts outside of federal loans like Perkins Loans or Federal Direct Student Loans (both need their separate application process), including any private student loans, if applicable, have been paid off successfully first.
At which point they can begin applying for these plans again with each lender separately during servicing under them over time until repayments get back on track without fail.
One other thing to note is that interest rates on federal student loans are set by Congress and cannot be negotiated, so there’s no real reason to consolidate these types of debt unless you have high-interest private or state loan debts alongside them.
There are also certain disadvantages of consolidating your student loans, including a longer repayment term and the loss of certain borrower protections. For example, when your loans are spread out across multiple lenders, you have more flexibility in choosing an income-driven repayment plan that best suits your financial situation.
What are some tips for making the process easier and less stressful?
This process is more time-consuming than it sounds. Although you have to pay some fees, there are ways to save money on them as well. The best thing you can do for yourself is research everything prior so that when the day comes, nothing catches you off guard or makes your head spin faster than necessary.
I would recommend finding a direct consolidation loan company rather than going through studentloans.gov if possible because of this reason- although they might be more accessible and less stressful initially, it’s easy to get lost in their web of links and dead ends where no one will answer an email/call back after trying multiple times with different people.
A direct consolidation loan company will only have one point of contact, and they can inform you immediately if there is a problem with your application or the status of your loans- it’s easier for them because they’ve already done this process before, so they know how everything works, where things are kept, etc.
The point of a direct consolidation loan is that it takes all your loans and rolls them into one- you pay this new company instead of the federal government.
In terms of fees, make sure to ask how much they are upfront when applying with any program because some companies charge based on an income percentage ratio while others will add in their fee within the loan total.
What are some tips for how to save money on your consolidated loan?
The first tip is to apply for an FSA ID. This allows borrowers to send their tax information online and receive any reimbursement related to student loans into an account that they can use for future education expenses.
The second tip is people should always communicate with lenders, even if the lender tells them there’s no reason why payments cannot be deferred or put on hold. If the borrower thinks he has been misinformed about payment options, then s/he needs to contact her servicer as soon as possible.
The third tip is people should always take advantage of any repayment plans they are eligible for. For example, suppose the borrower has graduated. In that case, he can enroll in an income-based repayment plan that will reduce his monthly payment to as low as ten percent of discretionary income.
The fourth and final tip is borrowers who have federal loans must consolidate their loans into one federal loan. This will combine all the student loans into one new repayment plan with a monthly payment and interest rate.
If you feel like your student loans are unmanageable, it may be time to look into consolidation. There are a lot of benefits to consolidation, and it may be worth looking into so you can take advantage of them.