Consolidating Your Student Loans: What You Need to Know

Consolidating your student loans makes them more manageable because you get one payment with one fixed interest rate. This is a required step to access some types of repayment plans.

Now that you’ve reached a major milestone and graduated, found a job, and have a steady income, it’s time to think about how to pay off that student loan debt. Consolidation can help you get organized, but it’s not the best choice for everyone.

What Is Consolidation?

By the time you finish school, you may have several loans. Each loan may be serviced by a different administrator. When repayment time comes, you can have multiple due dates, different methods of making payments, varying interest rates, and different minimum installment amounts that can make it very confusing and difficult to keep up with paying off your debt. Consolidation lets you combine your federal loans into one federal direct consolidation loan.

All of your old debts are paid off, and you get a new loan for the total amount of your old loans. The interest rate is fixed at a weighted average of your original loans. You keep the benefits of having a federal loan, and you can get access to more repayment options, like income-based repayment (IBR).

Consolidation Versus Refinancing

Sometimes the terms consolidation and refinancing are used interchangeably, but that is incorrect. Consolidation rolls multiple loans into one to simplify the repayment process. It usually doesn’t save you money or lower the interest rate. Federal direct consolidation loans only involve federal loans, not private ones.

Refinancing can also involve bundling multiple loans into one, but you can refinance both federal and private loans. However, refinancing is not available through the federal government, only through private lenders. For that reason, you lose the benefits of a federal loan, including access to some repayment plans. Refinancing usually involves a lower interest rate to save you money.

When Should I Consolidate?

Consolidation is a good way to get control of the repayment process. Here are some situations where it might make sense for you.

  • You want to spread out the repayment over a longer period. Sometimes the payments under a standard 10-year plan are difficult for a new graduate to manage. Spreading them out over a longer period can make them more manageable. Consolidation gives you access to terms of up to 30 years with smaller payments. While this can be helpful, remember that you pay more interest over the life of the loan.
  • You want to access an income-driven repayment plan. These repayment plans cap your payments at a maximum percentage of your income. After the repayment term, any balance you still have left is forgiven. You must consolidate to qualify for these options.
  • To get a fixed rate: If you have a variable rate, your payment goes up and down with the market. A fixed rate has consistent payments, which are easier to budget, even if the new interest rate is higher.

Are My Loans Eligible for Consolidation?

Before you can consolidate your loans, some specific requirements must be met.

  • You must have graduated, dropped below half-time student status, or left school for some other reason.
  • All the loans involved in the consolidation must be in the grace period, in repayment, in deferment, or in forbearance.
  • If you’ve already consolidated your loans once, you can’t consolidate that new loan unless you add another eligible loan to it (with some specific exceptions).
  • Loans in default must have a satisfactory repayment plan in place, or you must place your new consolidated loan into an income-based repayment plan.

What’s the Downside of Consolidation?

For all the good points about consolidation, it’s still not for everyone. Consider these points carefully before signing on for consolidation.

  • Consolidation probably won’t save you money. Historically, when the federal government still offered variable rate loans, consolidation sometimes meant a lower fixed rate. Today, however, the government only offers fixed rates, and in times of record low rates, there’s not much room to go any lower. Plus, the longer term of the consolidation loan means you pay more over the course of the loan.
  • Consolidation can impact your eligibility for forgiveness programs like those offered to teachers and medical professionals who agree to work in areas of great need. Even if you’re able to hold on to your eligibility, the clock starts over and you lose credit for any time you’ve already worked toward those commitments.

Remember that the application process to consolidate your loans is free and only takes about 30 minutes. Be leery of any person or organization that charges a fee to do this for you. The most important tip is to read carefully and check every option; then, consolidation may be a great start to getting out of debt.

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