There are those of you about to enter into world of loan repayment who may have heard about this thing called loan consolidation. You think you have an idea of what it means, but just aren´t quite sure. Well don´t let the technical jargon throw you off. Here´s a nice little break down to start you off on the right track. First important fact, loan consolidation can be achieved through a federal or private lender.
Consolidation vs. Refinancing
When one speaks about consolidating loans, they are referring to combining multiple loans into one. This allows you to have one bill and one easy monthly payment. In comparison, when you refinance, rather than combining loans, you take out a new loan under new terms in order to pay off other existing loans. If looking to work with a federal lender, the only option is loan consolidation. However, if dealing with private lenders, you consolidate your loans into one easy monthly payment by refinancing; the goal being to ideally receive a lower interest rate under those new terms.
Federal Loan Consolidation
- Direct Subsidized Loans and Unsubsidized Loans
- Direct PLUS Loans
- Federal Perkins Loans
It is important to understand that if you wish to consolidate your federal student loans through the Direct Loan Consolidation process you will not be able to include any private student loans.
When consolidating these loans, you are given a new interest rate which is determined by the weighted average of the interest rates of your existing loans. The new rate given will also be set at a fixed rate, which means you will not have to worry about it fluctuating over time. In addition, consolidating your federal student loans will extend your payment term, thus lowering your monthly payments. This however does not guarantee that you will save money over time — the longer it takes to pay off your loan, the more interest you’ll end up paying.
Private Student Loan Consolidation/Refinancing
As mentioned above, federal loan consolidation limits its service to US federal student loans only. However, you have the option to consolidate your private student loans through a private lender. Going through a private lender may offer similar benefits such as an extended payment term, but there are some differences. When consolidating your loans, private lenders do not take a weighted average to determine your new interest rate; instead, they take into consideration your current credit score and other applicable financial information. So, whether or not you get a better or lower interest rate will depend on your financial history at the time of application. Because your financial history is taken into account, this is a great option if your credit score and financial status has improved from when you first took out the loan.
Many private lenders strictly offer their consolidation services to private student loans, however there are some lenders who are beginning to expand their services to include federal student loans in the consolidation process.
For more information regarding the student loan process be sure to check out our Student Loan 101 resource page.