As of 2015, more than 40 million Americans have student debt. To put that in perspective, the population of Americans with student loans is greater than the entire populations of Australia, Canada, and 200 other countries. So if you are stuck with what feels like a mountain of student debt, do not think you are alone—40 million of your fellow Americans are in the exact same situation. But what can you do about it? One popular method of handling student loan repayment is to consolidate your loans, which can be a godsend for some students, but requires careful consideration before making that decision.
What is student loan consolidation?
Student loan consolidation is the process of combining multiple loans into one loan in order to decrease the amount the borrower is paying monthly, to elevate the period of repayment, and to simplify the act of paying the loan back (instead of making multiple payments to different lenders every month, consolidation allows the borrower to only pay once a month to one company.)
How does student loan consolidation work?
In the loan consolidation process, a company purchases several loans from other companies at a discounted price and creates one large loan. They levy their payment schedule and the interest rate and the borrower begins to make their payments to them. Basically, a lender pays off the debts, then pass that amount back to the borrower in the form of a single, larger loan.
In student loan consolidation, the process remains the same, though the companies involved may be a bit more altruistic.
Can I consolidate my federal and private student loans together?
Many sources will tell you that you cannot consolidate federal student loans and private student loans, but this is not exactly true. The federal loan consolidation program cannot combine private and federal student loans, but some private lenders are able to do so.
Banking organizations that are willing to consolidate federal and private student loans include: SoFi, Darien Rowayton Bank, Charter One Bank (Citizen’s Bank), CommonBond, and Education Success Loans. Each of these companies have their own eligibility requirements; those interested in consolidating their federal and private student loans together are encouraged to fully investigate all of their options before choosing a lender.
Should I consolidate federal and private student loans together?
While it is possible to consolidate federal and private student loans together, the bigger question is whether or not you should do it. In general, most advice on the subject discourages borrowers from consolidating the two types of loans together. However, for those whose finances and credit improve significantly after graduation, a private consolidation loans that includes both private and federal student loans may offer a much lower interest rate than the one-size-fits-all approach of the federal consolidation program.
Those interested in this route should understand that once they leave the federal loan program, they cannot enter back into it. Additionally, federal loans offer borrower protections– like deferment and forbearance– that private companies may or may not offer.
Federal student loan consolidation
If you borrowed money from the federal government in order to pay for school, you will likely be dealing with them once again when you want to consolidate.
Federal student loans can be consolidated through a Direct Consolidation Loan, which is backed by the United States Department of Education. If you choose to use a Direct Consolidation Loan, your new interest rate will be fixed at the average of all of the individual interest rates from your separate federal loans, rounded up to the 1/8 of one percent. Repayment begins 60 days after the loan has been disbursed and the term can last from 10 to 30 years, depending on the payment plan and the amount of the loan.
Applying for Direct Loan Consolidation is pretty easy, as it only requires interested parties to fill out an application, which can be found at this link.
Direct Consolidation Loans offer three main options to choose from for their repayment: the Income-Based Repayment Plan, the Pay As You Earn Repayment Plan, and Income-Contingent Repayment Plan. The first two (Income-Based and Pay As You Earn) are dependent upon the difference between a borrower’s adjusted gross income and 150% of the poverty line and take a borrower’s state of residence and family size into account. The payment amount changes as income does. The Income-Contingent Repayment Plan bases the monthly payment amount on adjusted gross income, amount of Direct Loans, and family size; it is calculated annually.
Income-Based and Income-Contingent Repayment Plans have a 25-year timeframe; if a borrower has made qualifying monthly payments, the outstanding loan amount will be forgiven at the end of that time. (However, it is important to note that the borrower will still be responsible for paying taxes on the forgiven amount.) Pay As You Earn has a term of 20 years.
What types of federal student loans can be consolidated?
- Auxiliary Loans to Assist Students (ALAS)
- Direct PLUS Consolidation Loans
- Direct PLUS Loans for Graduate/Professional Students
- Direct PLUS Loans for Parents
- Direct Subsidized Loans
- Direct Subsidized Consolidation Loans
- Direct Unsubsidized Consolidation Loans
- Direct Unsubsidized Loans
- Federal Insured Student Loans (FISL)
- Federal Perkins Loans
- Federal PLUS Loans for Graduate/Professional Students
- Federal PLUS Loans for Parents
- Federal Supplemental Loans for Students (SLS)
- Guaranteed Student Loans (GSL)
- Health Education Assistance Loans (HEAL)
- Health Professions Student Loans (HPSL)
- Loans for Disadvantaged Students (LDS)
- National Defense Student Loans
- National Direct Student Loans
- Nursing Student Loans (NSL)
- Subsidized Federal Consolidation Loans
- Subsidized Federal Stafford Loans
- Unsubsidized Federal Stafford Loans (this includes Nonsubsidized Stafford Loans)
- Unsubsidized Federal Consolidation Loans
What are the requirements for federal student loan consolidation?
In order to be eligible for consolidation, borrowers must meet certain requirements:
- They must have at least one FFEL Program loan or Direct Loan that is in repayment or in a grace period.
- They have graduated, left school, or are considered a less than half-time student.
- Generally speaking, a borrower must have at least $10,000 in student loans.
- For those whose loans are in default, consolidation cannot take place until after arrangements have been made with either the Department of Education or the guaranty agency that to whom some defaulted loans are passed. Typically, the Department of Education will require those looking to consolidate defaulted loans to make three consecutive, on-time, and voluntary payments before it can take place. Guaranty agencies may charge up to 18.5% of the outstanding loan and add it into the principal of the consolidated loan.
Advantages of consolidating federal student loans
- There is no cost to consolidate a federal student loan, nor are there any fees associated with it. If you stumble upon a resource that requires you to pay an advance fee in order to consolidate your federal student loans, do not do business with them because they are trying to scam you.
- Loans that are in default may be consolidated, provided they meet certain requirements.
- Borrowers may prepay their loan at any time with no penalty.
- Those that have variable interest loans are given the option of fixing the interest rate for life.
- Under some circumstances, it is possible to reconsolidate an existing FFEL Consolidation Loan without including any additional loans, however, this is fairly uncommon.
- Upon consolidation, a borrower will have access to different repayment options (like the Pay as You Earn Plan, which was set up for students whose current income is less than their loan debt.)
- Some may qualify for additional borrower benefits, like consecutive on-time payment reduction.
Disadvantages of consolidating federal student loans
- In most cases, the new interest rate of a Direct Consolidation Loan will not save you money
- If overall monthly costs do decrease, then it is likely the result of a longer loan term. This means that while you may be spending less money per month, in the long run, you are actually spending more money due to the interest rate
- Students cannot consolidate their loans while they are in school; to qualify for consolidation, borrowers must have graduated, left school, or be considered to be going to school less than half-time.
- Any benefits that came with the original loans are nullified upon consolidation. For example, a Perkins Loans is eligible for forgiveness if the borrower enters law enforcement, is deployed with the military, joins the Peace Corps, or enters certain education fields. However, this benefit is lost if one choose to consolidate it.
- In most cases, borrowers cannot consolidate an existing consolidation loan again unless they include an additional FFEL Program loan or Direct Loan with it.
Should I consolidate my federal student loans?
Consolidation is not a panacea for debt worries, and it is not the best option for everyone, but it can be of benefit to some.
- Those who have trouble remembering the different payment due dates of their various loans may find it helpful to only have to remember to make one payment to one lender per month.
- Those with variable interest loans may find it advantageous to lock in a fixed rate, especially if the rate is high.
- Those having trouble making their payments may find that although in the long run they will end up paying more, the need for monthly relief is great enough that the trade-off is worth it.
Private student loan consolidation
Borrowers looking to consolidate or refinance their private student loans may be looking at an arduous and likely impossible journey, especially if they graduated recently. Private financial institutions are often much more hesitant to consolidate student loans because of the amount of capital it requires and, in fact, very few companies offer true consolidation because of the expense. It is slightly easier to refinance a private student loans, but even then, the requirements can be too much for a recent graduate. For example, Aryea Aranoff, the chief strategy officer of Darien Rowayton Bank Education Finance, an institution that offers student loan refinancing, says that, “If you’re making less than $60,000 per year, it’d be hard to refinance with us or any other low-rate private lenders.” The minimum credit score for qualifying to refinance with his company, Aranoff says, is 680. SoFi, another private lender that refinances student loans, is considered to have an above-average applicant acceptance rate, which, in this case, amounts to 20% to 40%.
Companies that offer student loan consolidation
Private lending institutions that offer student loan consolidation include:
- SoFi Social Finance, which has the lowest rates, but poor customer service and requires 90 days of employment proof. They do, however, offer borrower benefits, like unemployment protection and career support.
- Education Success, which has low monthly payments, but a higher interest rate.
- CU Student Loans, which offers decent rates, but requires good credit history and $24,000 annual gross income.
- Common Bond, which is for students with advanced degrees
- Darien Rowayton Bank, another company for those with advanced degrees but has hefty income and credit score requirements.
- Charter One, which offers a fixed interest rate and is popular with those who did not finish school.
- Wells Fargo, which offers terrific benefits if you are already a Wells Fargo customer.
The application process
Besides requiring basic information like your name, address, email, social security number, and date of birth, private lending institutions also usually require employer and income information and the details of not only your outstanding student debt, but that of any other outstanding debt, such as auto loans, credit card debt, and mortgages. For those fortunate enough to have a cosigner, the same information may be requested of them. It generally takes 45 to 60 days for an application to be processed. Those who take this route should be sure to continue making their payments on their student loans during this time.
Advantages of private student loan consolidation
- It is possible to get a lower interest rate, as it is often based on the borrower’s current financial situation (including their credit score).
- Lower interest rates mean a lower monthly payment and, possibly, a shorter payment term. This is in addition to the amount of money one can save by having a lower interest rate.
- There are no prepayment penalties
- Some companies may offer a variety of repayment plan options that can be quite helpful to the recent graduate.
- Borrowers only make one payment per month to one lender.
Disadvantages of private student loan consolidation
- Consolidating private student loans can quite difficult, as very few companies still offer that particular service.
- Private loan consolidation is harder to qualify for because there are usually more stringent credit requirements
- A cosigner with good credit is often still needed.
- Finding a lower interest rate may be hard, or even impossible. Unlike federal consolidation, the lender sets the rate, meaning that factors such as your credit score, income-to-debt ratio
Should I consolidate my private student loans?
Though private student loan consolidation is more difficult than federal loan consolidation, it is still a viable option for borrowers who are able to meet the higher standards of private lenders and who are looking to decrease their interest rate or simplify their monthly payment process.
Whether you should or should not consolidate your student loans depends on your specific situation. Gather all of the information on your loans (such as type, amount, and who the lender is) and explore your options. Consolidation is just one route you can take on your journey to a debt free post-college life.
Macklin, Dan (2014) Can I Consolidate Federal & Private Student Loans Together? Available from: http://blog.credit.com/2014/11/can-i-consolidate-federal-and-private-student-loans-together-101368/.
McCarthy, Kyle (2014) 10 Fun Facts About the Student Debt Crisis. Available from: http://www.huffingtonpost.com/kyle-mccarthy/10-fun-facts-about-student-loan-debt_b_4639044.html.
Miller, J. (2007) Stop Worrying About Money and Start Living Your Life. Published by James T. Miller.
Sheehy, Kelsey (2013) Student Loans: What to Consider Before Consolidating. Available from: http://www.usnews.com/education/best-colleges/paying-for-college/articles/2013/10/02/student-loans-what-to-consider-before-consolidating.
Simpletuition.com. Federal Student Loan Consolidation. Available from: http://www.simpletuition.com/student-loan-consolidation/federal-loan/.
Simpletuition.com. Private Loan Consolidation. Available from: http://www.simpletuition.com/student-loan-consolidation/find/?tfc_src=596&trackingId=ConsolCTA.
Simpletuition.com. Student Loan Consolidation Basics. Available from: http://www.simpletuition.com/student-loan-consolidation/.
Simpletuition.com. Student Loan Payback. Available from: http://www.simpletuition.com/refinance/student-loan-payback/.
Snider, Susannah (2014) Private Student Loan Refinancing Carries Risks, Rewards. Available from: http://www.usnews.com/education/best-colleges/paying-for-college/articles/2014/12/15/private-student-loan-refinancing-carries-risks-rewards.
Studentaid.ed.gov. Don’t get discouraged if you are in default on your federal student loan. Available from: https://studentaid.ed.gov/repay-loans/default/get-out.
Studentaid.ed.gov. Loan Consolidation. Available from: https://studentaid.ed.gov/repay-loans/consolidation.
Studentloans.gov. Federal Direct Consolidation Loan Instructions for Application and Promissory Note. Available from: https://studentloans.gov/myDirectLoan/viewEmptyConsolPDF.action.
Wolf, Anna (2014) What’s the Difference Between Federal Student Loan Consolidation and a “Private Consolidation Loan”? Available from: https://www.sofi.com/blog/student-loan-faq-whats-difference-federal-loan-consolidation-private-consolidation-loan/.