This month, I’ll be writing full articles answering questions that have been asked by my clients and Money Circle members. One question that comes up consistently is this: how can I consolidate my loans, and what are my options? Debt consolidation can be a great option if your monthly payments are high, or if you feel like you have too many different accounts to pay each month. Options will differ based on your personal situation, so there isn’t a one-size-fits-all solution. This post will also talk a little bit about student loan refinancing, which is sometimes called “private student loan consolidation”.
Options will differ based on your personal situation, so there isn’t a one-size-fits-all solution.
The Difference Between Consolidation and Refinancing
Debt consolidation and debt refinancing are two different things and they have different outcomes. And based on your financial situation, one may be better for you than the other.
Consolidation:
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Debt consolidation applies to your federal student loans, and is done through a government website.
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Debt consolidation combines your multiple federal loans into one monthly payment, with one fixed interest rate (which is the weighted average of all the interest rates you’d been paying).
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If you’re consolidating to lower your monthly payments, the life of your loan can increase to up to 30 years.
Refinancing:
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Refinancing means you’re moving your student loans to a private loan company.
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Both federal and private student loans can be refinanced.
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If you refinance your student loans with a private company, you will be ineligible for student loan forgiveness.
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Your credit history will determine the interest rates and other parameters of a refinanced loan.
Why You Might Want to Consolidate
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If you struggle to make your monthly payments and need them to be lower.
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If you’re in default and want to get back into repayment.
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If you need to consolidate to be eligible for income-driven repayment or public service loan forgiveness. This is the case if you have Federal Family Education, Perkins or parent PLUS loans.
The Pros and Cons of Consolidating
There are pros and cons for any financial decision. The important thing is to weigh both sides of the coin and figure out what makes the most sense for you. What might be right for someone else, might not be right for you. So it’s imperative that you look at your lifestyle and needs and make a decision based on them.
Pros:
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Consolidation may make your student loans more manageable by combining payments into one lower monthly bill.
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Consolidation is a way to get out of default and back into current repayment.
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You can switch any variable-rate loans you have to a fixed interest rate.
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If you consolidate loans other than Direct Loans, it may give you access to additional income-driven repayment plan options and student loan forgiveness.
Cons:
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Consolidating can prolong your loan repayment period, and thus increase the amount you’re paying in interest.
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If you’re paying your current loans under an income-driven repayment plan, or if you’ve made qualifying payments toward the student loan forgiveness program, consolidating your current loans will cause you to lose credit for any payments made toward those plans.
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You can’t consolidate private loans through the federal Direct Consolidation Program.
How You Can Consolidate
Visit StudentLoans.gov. There, you can apply for a consolidation loan and sign a promissory note. You will need all of your student loan account information for this. You will also choose which loans you wish to consolidate. At this time, you will choose which type of repayment plan you want once the consolidation is complete. Make sure you look into the different repayment options first. Once you submit your application, continue making your monthly loan payments as usual until you get confirmation that the consolidation is complete.
If You Decide to Refinance Instead
Perhaps after reading this article, you decide that loan consolidation won’t actually help you, and you want to refinance instead. That’s great! That means you have received information that shows you what is right for you. But how should you go about doing that?
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Make sure your financial house is in order. Your financial history, including your credit score, income, and job history, will all impact whether or not you’re approved for a refinanced loan. It will also determine the interest rate and other fees involved. You should be in good financial standing if you’re going to apply for student loan refinancing.
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Do your research! There are so many consolidation companies out there. You want to make sure you’re choosing one that is reputable and that actually helps you get to a better financial place.
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Compare your options. Refinancing companies will let you get a quote for what your rates will be based on your credit score and credit history. Make sure you’re aware of what your current interest rates are versus what the refinanced rate would be. You’re ideally trying to save money, so you want the interest rate to be lower.
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Read the fine print. Make sure you’re aware of any hidden fees or variable interest rates. One important potential fee is a early payoff penalties. This means that you get charged extra fees if you pay off your loan sooner than the original terms. If you’re lucky enough to pay off your loan faster than planned, make sure you won’t be punished for it. Another important fee is an origination fee. Most loans (and credit card balance transfers) include origination fees, but some places don’t have them. Sometimes, it can be a substantive amount of additional money, so do your calculations and see what makes sense for you.
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Be realistic. This is not a magic fix for your student loan debt. Yes, if it’s right for you, it might help you save money and pay your loans off faster. But you still have debt to pay off. Make sure you’re financially prepared for this change so that you don’t default on the new loan.
Regardless of what you decide, make sure you do your research and weigh the pros and cons. It can be scary to make big financial decisions, but it gets a little bit easier if you’re moving forward as informed as possible. And make sure you’re doing what’s best for you, not just doing what you think you should do, or what other people are doing.
Companies that Refinance Your Loans:
This is not a complete list. It’s just a way to get you started on your research. See the other resources below for in-depth comparisons for many of the different companies and what their rates and requirements are.
Other Resources:
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http://time.com/money/4551212/should-consolidate-federal-student-loans/
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https://studentloanhero.com/should-i-consolidate-my-student-loans-consider-this/
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http://www.journeytolaunch.com/episode36/
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https://www.nerdwallet.com/blog/loans/student-loans/consolidate-student-loans-2/
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https://studentaid.ed.gov/sa/repay-loans/consolidation
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https://studentloanhero.com/5-banks-to-refinance-your-student-loans-0107/
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https://www.credible.com/blog/refinance-student-loans/best-companies-to-refinance-and-consolidate-your-student-loans/
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https://www.nerdwallet.com/refinancing-student-loans
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https://studentloanhero.com/featured/direct-loan-consolidation-right-choice/
