Federal Student Loan Consolidation
Federal student loan consolidation is a fixed-rate refinancing program that combines all your existing federal student loans into a new loan. Terms range from 10-30 years. The interest you pay is determined by a formula set by the federal government based on average of the loans you currently have and are applicable at the time you apply for consolidation. It also depends on the types of loans you have and when you took them out. The calculated rate is typically rounded up to the nearest 0.125%, and capped at 8.25%. You can calculate your potential consolidation rate using FinAid's Financial Calculator.We have already seen how student loan consolidation offers you the benefits of reduced monthly payments thanks to an extended payment term which frees up your money to pay help you pay your other bills or save some money each. However, federal student loan consolidation has some added benefits in that you are NOT required to be employed at the time you apply, undergo credit checks, have any collateral, or have a cosigner of any kind. Moreover, there are no penalties for overpayment so you can make bigger payments to reduce your repayment term when it is advantageous for you to do so. To qualify for federal student loan consolidation, you must meet the following criteria:
1. You must no longer be in school or be enrolled less than half time;
2. You must have at least one Direct Loan or Federal Family Education Loan that is currently in its grace period or actively being repaid;
3. You must have a loan other than a single Direct Consolidation Loan (i.e. a Direct Consolidation loan cannot be the only loan to be involved in the process). If you do have a Direct Consolidation Loan, you cannot consolidate again unless you include an additional FFEL or Direct Loan. However, there are some circumstances where you may be able to apply for consolidation again if you have FFEL Consolidation Loan; and
4. Defaulted education loans can be consolidated provided you've made repayment arrangements with your current lender or agree to pay your new Direct Consolidation Loan under the Income Based Retired Plan or the Income Contingent Retirement Plan.
Follow the link below to begin the application process:
Federal Student Loan Application
One useful bit of advice we have for you is that you may want to consider consolidating during your grace period (i.e. in the months immediately following graduation where you are not required to immediately start making payments). This can let you lock in a lower consolidated interest rate but you do have to start making payments sooner. We also recommend that you do not consolidate your federal loans into private ones. Doing so will result in you losing certain benefits such as the ability to defer payments, qualify for forgiveness under certain federal programs, and/or apply for forbearance. Also, you should never have to pay a free to consolidate your federal loans.
Private Student Loan Consolidation
Private student loan consolidation lets you consolidate all your private, non federal student loans into a new manageable loan. The main benefit of consolidating your private student loans is the ability to make a single payment each month. You typically won't end up paying any less, however. Your monthly payments may be reduced if you negotiate a longer term but you will then likely pay more in interest. If, however, your credit score has improved since the time you first took out your loans, you may be able to have you interest rates reduced. Your rate may also be reduced if you have a co-signer with very good credit.
Repayment terms are typically up to 25 years for undergraduate borrowers and 30 years for graduate borrowers. Other benefits of private student loan consolidation include a 48 month defer medical/dental residents and a 36 month deferment for all active-duty military personnel and, as with federal student loan consolidation, there are no penalties for early payments. (Excess payments go towards paying down the principal).
Interest rates for consolidating private student loans are based on either the LIBOR or Prime index, plus a margin for borrower or cosigner credit. Origination fees range between 0% and 8% depending upon the borrower or co-signer's credit. These fees are sometimes due at closing, which means the amount borrowed is increased but this avoids any out-of-pocket expense at closing time.
Other Student Loan Consolidation Options
Aside from federal and private student loan consolidation, there are some other consolidation alternatives that you may wish to consider. Firstly, income-based student loan consolidation is a viable alternative for those who are initially struggling with a low income following graduation but expect their income to increase substantially relatively soon. In income-based student loan consolidation, you essentially agree to pay your lender a fixed amount each month plus a certain percentage of your income (ranging from 2-5%).
Some lesser known student loan consolidation alternatives involving community or private service can substantially reduce or eliminate your debts entirely. If you are a law student, for example, your school may agree to pay a certain amount towards the repayment of your loan each year if you agree to work pro bono (or for a low hourly wage) in certain public service fields following graduation. This may, for example, include providing legal consultation to the poor. Similar programs exist for teachers, doctors, and health care professionals. By agreeing to perform volunteer work and/or offering your services in low-income areas where there is a shortage of professionals in your field for a certain length of time, your debt can be wiped out or substantially reduced. You may also be able to work out a loan repayment agreement with your employer in your chosen field.