If you have student loan debt, you know how frustrating it is to manage all the payments and loan companies. This can get especially difficult to manage when your student loans are transferred between different lenders.
For students juggling loan payments between two or more lenders, the idea of consolidating your payments can seem like a no brainer. While student loan consolidation is possible, it’s important to know how it works and why you might want to consolidate your loans or keep them separated. Before you sign up for the first consolidation offer you find, do your research and understand how student loan consolidation works.
How Does Student Loan Consolidation Work?
Consolidating your student loans means that you’ll work with one company and make one payment instead of managing multiple payments and loan companies. The important thing to remember is that private student loans and federal student loans generally cannot be consolidated together. If you’ve accumulated student loans through college, there’s a good chance that some of them are federal loans and some are private loans. Keep detailed records of each and consider consolidating them separately as a strategy to manage your payments better.
Federal Loan Consolidation
Just because you have a federal student loan doesn’t meant that you should consolidate. In fact, in order to be eligible, you need to have at least one Direct Loan or FFEL (Federal Family Education Loan) in its grace period or in repayment. Always make sure you understand the terms of your original loans before you consolidate. While your federal loan payments may be lowered, the term may be longer, meaning that you’ll end up paying more interest in the long run.
Federal Loan Consolidation Company
Direct Loan Consolidation is the government organization that allows you to consolidate your federal loans into one manageable loan, called a Direct Consolidation Loan.
Current Interest Rate for Federal Loan Consolidation
Direct Loan doesn’t have an advertised rate for you to consolidate your loans. Instead, they take the weighted average of your loans and apply the average rate to your consolidated balance. They explain the calculations here.
The nice part about Direct Loan is that you can prepay your loans without penalty. You can also get a 0.8% interest rate deduction if you maintain 12 months of on time payments. So if your average rate was 7%, you could theoretically see a drop to 6.2% if you’re consistently making your payments for 12 months in a row.
Which Federal Loans Are Eligible to Consolidate?
Not all loans are eligible for consolidation through Direct Loan. The following list of eligible loans was obtained through the Loanconsolidation.ed.gov website.
- “Direct Loan Types
- Direct Subsidized Loans
- Direct Unsubsidized Loans
- Direct PLUS Loans (for parents or graduate and professional students)
- Direct Subsidized Consolidation Loans
- Direct PLUS Consolidation Loans
- Direct Unsubsidized Loans, Including Direct Unsubsidized Loans (TEACH) (converted from TEACH Grants)
- Non Direct Loan Types
- Subsidized Federal Stafford Loans
- Guaranteed Student Loans (GSL)
- Federal Insured Student Loans (FISL)
- Federal Perkins Loans
- Unsubsidized and Nonsubsidized Federal Stafford Loans
- Federal Supplemental Loans for Students (SLS)
- Unsubsidized Federal Consolidation Loans
- National Direct Student Loans (NDSL)
- National Defense Student Loans (NDSL)
- Subsidized Federal Consolidation Loans
- Auxiliary Loans to Assist Students (ALAS)
- Health Professions Student Loans (HPSL)
- Health Education Assistance Loans (HEAL)
- Federal PLUS Loans (for parents or for graduate and professional students)
- Parent Loans for Undergraduate Students (PLUS)
- Nursing Student Loans (NSL)
- Loans for Disadvantaged Students (LDS)”
Private Loan Consolidation
The private student loan industry is full of competitors who want you to borrow from them. The biggest name in private student loans, as you probably know, is Sallie Mae.
If you have multiple loans with a single lender, it’s likely that you’ll have a single payment each month. But if your private loans are through different lenders, you could end up with two, three, or multiple payments each month.
Private Loan Consolidation Companies
The site FinAid.org highlights 7 private loan consolidation companies that are most often used.
- Wells Fargo Private Consolidation Loan – The minimum loan consolidation at Wells Fargo is $5,000 and the max can be as high as $100,000 depending on your credit score. Their 15 year terms and variable/fixed rate options are attractive options for private loan consolidation. They even offer rate reductions for qualifying account holders.
- Student Loan Network Private Loan Consolidation – They require a $10,000 minimum consolidation amount and do not assess any prepayment penalties. You can have up to a 30 year repayment term for high balance consolidations.
- NextStudent Private Consolidation Loan – Currently not offering student loan consolidation options due to the conditions in the student loan market and financial sector.
- SoFi Graduate Loan Refinancing – At a 5.99% fixed rate, the SoFi consolidation option is great for graduates looking for a 5, 10, or 15 year repayment term. No origination fees and no prepayment penalties are also attractive features.
- DEAL Consolidation Loan – This is a very specific option for borrowers who have at least one private loan from the bank of North Dakota. If you don’t have a private loan through them, you’re not eligible.
- cuStudentLoans.org cuGrad Private Student Loan Consolidation – Offering a 4 year interest-only repayment option, cuStudentLoans.org will consolidate loans as long as they total $7,500 or more. With an origination fee of 1%, you might want to consider another lender if possible.
- Cedar Education Lending Private Student Loan Consolidation – This group offers a 15 year repayment plan as well as an interest only plan for up to 4 years. Prepayment is allowed, but you will need to show proof of steady income of at least $2,000 a month (gross income).
Current Interest Rates for Private Student Loans
While the Federal student loan rates are locked in for everyone, private student loan rates depend on your credit score. The better your score, the lower your rate. For a student who doesn’t have very good credit yet, it might be to their advantage if they maintained the payments for a year while they build their credit after they graduate.
Alternatives to Student Loan Consolidation Options
Home Equity Line of Credit – If you own a home, crunch the numbers to see if you would be better off paying down you student loans with a HELOC. Just make sure it doesn’t put you underwater in your mortgage.
Borrowing from Parents – With interest rates so low at banks, the idea of making 5% or more is fantastic. If your parents are willing to lend you money to earn a higher rate than their bank, you could be in a great situation. But…it’s always dangerous to borrow from family.
Education Reimbursement – Many companies offer tuition assistance and educational reimbursement benefits. Check with your company and make sure this is a benefit that you’re looking for when applying for a new job.
5 Questions to ask before you consolidate your student loans:
At the end of the day, it’s up to you to do your homework to find out if it’s beneficial to consolidate your student loans. Here are some questions to ask before you sign any papers.
- Are there any fees to consolidate my loans?
- Are there penalties if I pre-pay my loans?
- What are the loan terms? (Interest rate and years)
- Are the rates fixed or variable?
- How long will the process take?
Have you consolidated student loans in the past? What advice would you give someone who has just graduated with multiple student loans?