Student loan consolidation has two types: private and federal. Private consolidation commonly refers to refinancing. Students may think that the consolidation processes are ambiguous. However, they are somewhat different. Federal student-loan consolidation accumulates numerous loans and makes it one federal loan with the help of the Department of Education.
To qualify for federal loan repayment plans, you might need to consolidate. Nevertheless, the federal consolidation process will not result in a lower interest rate for you. It might minimize your payments by extending them.
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Student Loan Refinancing
Student loan refinancing and private student loan consolidation are the same. It refers to a financial move that you complete with the help of a private lender. If you are eligible, you may save money as you can get a lower interest rate.
Read More: How do Student Loans Work?
What Is the Difference Between Student Loan Consolidation and Student Loan Refinancing?
Student loan consolidation integrates different federal loans into a single federal loan. It allows you to combine federal loans only. You cannot have lower interest rates; however, consolidation can minimize your payment by extending the loan period. However, in this case, your interest amount will go up. You may avail of repayment facilities, federal loan protection alongside the forgiveness program. You can make a single payment on a monthly basis.
On the other hand, student loan refinancing refers to combining federal and/or private loans into a single private loan. In addition, you can have lower interest rates. As a result, you can save money. You cannot access federal loan protection, forgiveness plan, and repayment facilities. You can make one payment on a monthly basis.
Private Student Loan Consolidation
Private student loan consolidation or refinancing pools multiple loans, i.e. federal, private, or both of them, and makes it a single private loan. Students can save money if their new loan comes with a lower interest rate. The students’ financial history, such as credit score alongside job history and qualification impact their new interest rates at the time of refinancing.
Generally, your credit score has to be in the high-600s to become eligible, whereas rates vary from 2% to in excess of 9%. Students can consider refinancing if they have made at least some student loan-payments on-time after completing school.
Decent or excellent history, which is usually in the high 600s, also makes refinancing easier for you. A permanent or stable job is necessary for refinancing. Refinancing federal student loans into a private loan is equivalent to losing consumer protection related to federal loans.
Additionally, private companies provide you with the option of integrating multiple student loans into one. Nonetheless, you cannot transfer private loans to the federal government; you can consolidate both private and federal loans with a private lender. The objective of this process is to avail the facility of a single payment and to obtain a lower interest rate depending upon your financial history.
The consolidation calculator helps you compare monthly payments in three different situations: federal student loan consolidation, private student loan refinancing, and income-based repayment programs.
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Is It Possible to Pay Less for Student Loans?
You can check if you pre-qualify for refinancing and make a comparison of actual rates, and not only estimates or range.
Federal Student-Loan Consolidation
Federal loan consolidation does not require credit, and it provides the advantage of a single loan payment and effectively lower payments. It only applies to federal loans, and it won’t slash your interest rates. Consider opting for federal consolidation if you:
- Want to qualify for income-based repayment or public service loan exemption. It is applicable if you avail of Federal Family Education, PLUS loans, or Perkins.
- Prefer a single federal loan payment, but do not want it to be extremely lower.
Once you consolidate federal loans, the government pays back these loans and substitute it with a direct consolidation loan. Typically, you qualify after your graduation or when you leave school. Loan consolidation with the help of the Department of Education is free of cost; avoid companies that charge fees to consolidate loans for you.
When students consolidate federal loans, their new interest rate is the weighted average of their previous rates. Furthermore, you will get a new loan period, which can be from 10 years to 30 years. Your repayment term usually starts within 60 days of the first disbursement of your consolidation loan; it will base on your total federal student-loan balance along with other factors.
Read More: Should I Pay off My Student Loan?
What Is the Way to Consolidate Federal Loans?
Check the official website of student loans and fill out Loan Consolidation Application with Promissory Note. The candidates need to complete the application in one go. Make sure you have all the documents mentioned in “What do I need?”
- Mention which loans you want to consolidate.
- Select a repayment program. You may either receive a repayment timeline depending upon your loan balance or choose one that associates payment with income. If you select an income-based plan, you will complete an Income-Driven Repayment Program Request form.
- Read all the terms and conditions before online submission. Keep making student loan payments as normal unless you get confirmation from your servicer that consolidation is complete. If you have loans in default, consolidation is among a few approaches to streamline your loans. In order to consolidate defaulted loans, you might need to make three full, timely successive monthly payments on the defaulted loan and agree to enroll in an income-driven repayment program.
The official website of student loans guides you on how to consolidate student loans. You need to follow all the steps and complete the application.
Read More: What Happens If You Don’t Pay Student Loans?
Student loan consolidation means combining multiple loans into a single federal loan with a particular interest rate depending upon the interest rate average on the loans that are consolidated. The Direct Consolidation Loan enables you to consolidate numerous federal education loans into a single loan. Student loan refinancing means combining federal and/or private loans into a single private loan. After the completion of the consolidation process, students can repay the loan through a single payment on a monthly basis.