College and university tuitions are at an all-time high, leaving more and more students in debt. Most students take out loans to help cover the cost of tuition, and many students take out multiple loans. If this is the case, loan consolidation may be helpful.
Consolidating student loans can be beneficial if you have taken out multiple loans to cover the costs of student debt. Consolidating student loans means that you combine all of your student loans into one monthly payment. Rather than trying to juggle 3-4 different monthly payments with varying interest rates, it is consolidated into one monthly payment with a fixed interest rate. There are two routes that you can take when consolidating student loans, one is through the U.S. Department of Education, and the other option is to go through a private lender.
If you choose to consolidate your student loans through the U.S. Department of Education, you will have a new monthly payment, a new loan term, and a fixed interest rate that is determined based on the average of all of your student loan interest rates. Most federal student loans are eligible for consolidation, A Direct Consolidation Loan will consolidate all eligible federal student loans into one monthly payment. Generally, most people are eligible for loan consolidation after graduating, leaving school, or dropping below half-time enrollment.
There is no fee to apply for the Direct Consolidation Loan and you may gain access to additional loan repayment plans and/or forgiveness plans. It can be completed in approximately 30 minutes and all you need is your FSA ID, personal information, and financial information. Additional information, as well as the link to the form, can be found here.
For private lenders, each company will offer something a little different. It may require additional research to find the right lender. Generally, most lenders will ask about the following to determine eligibility.
- Credit score – Most lenders will want a minimum of 670 – which is considered a “good” credit score.
- Credit history
- Proof of stable income – some lenders may have an income minimum.
- Debt-to-income ratio – if more than 40-50% of your monthly income goes towards paying off debts, the lenders may be less inclined to help. Extending repayment timelines will help lower the monthly cost.
Consolidating with private lenders might make more sense for you if you have both federal and private loans. If you have a good credit score and a stable job, you could also qualify for better terms (like a better interest rate) by going through private lenders. Before consolidating with a private lender, it’s important to remember that you won’t qualify for federal loan forgiveness programs with a private loan.
In general, there are several benefits to consolidating loans.
- Can simplify your monthly student loan payments.
- Can lower your monthly payment if you choose to extend your loan repayment timeline.
- You can switch from variable interest rates to fixed interest rates.
However, there are also some negative aspects of loan consolidation to consider.
- If you choose to lower the monthly payment, but extend the time to repay the loan, you could end up paying more money in the long run. This is because more interest will build up over time, which will lead to more money that you have to pay in order to pay off the loan completely.
- If you have outstanding interest at the time of the loan consolidation, it will be added to the principal balance. This means that the interest rate is going to be higher, to account for the added balance, than if you had not consolidated.
- You may also lose any benefits associated with the original loans — like interest rate discounts, principal rebates, or some loan cancellation benefits — when you consolidate.
- If you have multiple loans that do not have any benefits associated, you can consolidate those without risk to your benefits.
If you choose to consolidate loans, you cannot reverse the process. Once your loans are consolidated into a Direct Loan Consolidation or through a private lender, they no longer exist as separate loans.
When considering if you want to consolidate your loans, it may be helpful to try to do some math to see what makes the most sense for your situation. The higher the interest rate is, the more money you will be paying. Even if the monthly payments are lower when looking at a plan that has high interest rates, you probably will end up paying more just because of interest. Whereas high monthly payments may seem more expensive, but if they have lower interest rates and are shorter-term, you may save money in the long run.
Loan consolidation can be very helpful for some people, but it depends on your situation. There are also other options available for student loans, including refinancing student loans and student loan forgiveness.
If you’d like to learn more about the resources Mary Rigg may have to help you, connect with someone on our Family and Financial Resource team by calling 317-639-6106.