Updated: Nov 7, 2019
Student loan consolidation is one of the more confusing topics that I deal with. The term “consolidation” is the biggest issue that creates confusion, as it relates to student loans. When I hear the word consolidation, like most people, the first thing that comes to mind is consolidation to pay off credit cards faster. The idea is to lower my interest rate or lower my monthly payment and get out of debt. This can be accomplished by taking out a personal loan or doing something like a home equity loan. Most banks and credit unions offer these programs including many in the area: Team One Credit Union, Wildfire Credit Union, Chemical Bank, and Independent Bank all offer these types of loans. However, when we are referring to student loans, consolidation does not necessarily mean a lower interest rate and paying off your loans sooner. In the rest of this article, I will discuss what student loan consolidation actually means as well as other common student loan strategies. If you are still unsure or confused about your student loans there will be a link at the bottom of this article to contact me for a free consultation and analysis of your student loan situation.
Federal Student Loans
When it comes to student loan consolidation, most of the time people are referring to federal student loans. These can be in the form of unsubsidized, meaning interest will accrue while you are in school, and subsidized loans where interest does not accrue until you start repayment. Examples of the most common federal student loans are:
Stafford Loans both subsidized and unsubsidized
Federal Family Education Loan (FFEL)
Federal Direct Loans both subsidized and unsubsidized
Federal Direct Plus Loans (often referred to as parent plus loans)
If you are unsure if your loan is a federal loan, it will usually tell you on the statement or you can call your provider and ask. Common federal loan servicers include: Nelnet, Navient, MOHELA, and Great Lakes Educational Loans. Here is a full list of servicers.
Consolidating federal student loans does not reduce interest rate
When consolidating student loans into a direct consolidation loan, there is NOT a rate reduction. The interest rate is simply the weighted average of your loans rounded up to the nearest 0.125%. It is important to understand this if your primary objective behind consolidating your loans is paying them off faster and saving money. Like I said at the beginning of this article, this is not usually what we think of when we think of loan consolidation. Federal student loan consolidation is simply taking all your loans and combining them into one so you have a single monthly payment. From a perspective of simplifying your life, this offers a nice advantage of only dealing with one servicing company. However, if your primary goal is paying the loans off faster, this does not accomplish that. Let me give you an example of how this would be the case using the standard 10 year repayment. Here is a list of student loans and their interest rates:
If we were to consolidate this into one $22,125 direct loan, we would have an interest rate of 6.375% because of the nearest 0.125% rounding up with a payment of $249.82. The total interest you pay over the loan will be $7,853. As you can see you would pay and additional $93 in interest over the loan just by consolidating.
If you have extra cash flow to pay towards your student loans and you consolidate, you are paying and working away at the total loan balance. If you leave them separated, you can go after loans with higher interest rates to save additional interest and free up monthly payments faster. The larger the student loan balance you have, the bigger the impact these differences in payment options can have.
So why would anyone consolidate student loans?
There are reasons people could choose to consolidate their loans regardless of not getting a lower interest rate. For some individuals, the matter of convenience is a big issue. If someone has multiple student loan servicers, they might prefer to have just one monthly payment, one login, and one interest statement every year for tax purposes. When you consolidate your loans, you get to choose which loan servicer you want to work with which can make things easier.
For others, consolidation might be necessary to qualify for public service loan forgiveness. Public service loan forgiveness is a program designed to forgive student loans for individuals working in the public sector after 120 payments on their loans. Public service loan forgiveness can only be achieved by selecting income driven repayments. If you have a Perkins Loan, FFEL Loan, or Parent Plus Loan, you are not eligible to pay these back on income driven repayments. If you consolidate these loans into a direct consolidation loan, you are then able to select income driven repayments to make those loan eligible for income driven repayments.
If you are struggling to make your payments on a Perkins, FFEL, or Parent Plus loan and do not work in the public sector, you can still consolidate your loans in order to help manage your payments. This would result in paying more interest over the life of the loan but might be necessary due to cash flow needs.
Student Loan Refinancing
If you are looking to pay off your student loans faster, the best option is to look at the private loan market. There are lenders that offer to refinance student loans. The difference between a refinance and a consolidation is a refinance results in a new interest rate and new terms. Private student loans require qualification through credit checks and income verification. This can make it more difficult to qualify for rate reduction. This can be especially frustrating to individuals who have recently graduated as often time their credit score is low due to lack of credit history, and their debt to income ratio is high because entry level jobs are often the lowest income years for recent graduates. Some of the largest companies that offer refinancing options for student loans are the following:
PenFed Credit Union
These are some of the largest companies in the private loan refinance business, however; there can be local solutions, as well, like Independent Bank and PNC that might be a better fit. When deciding on what is the best solution, it is best to compare the differences in rates, payment terms, refinancing fees, and prepayment penalties. Refinancing to a private loan is also the only way for a borrower to get a parent off of the loan they cosigned. This is contingent on the student being able to qualify with their own credit and income. If you are looking for reviews by a third party (not Recker Financial) on their experiences with refinancing options you can visit https://www.consumersadvocate.org/student-loan-refinance
There are a couple of items you need to be aware of before you decide to refinance into a private student loan. The first thing is private loans are not eligible for any type of government loan forgiveness program. You really want to do your research or speak with someone to see if you qualify for any type of forgiveness, especially if you work at a school, hospital, or any job in the public sector. You want to weigh the possible differences in interest saving verses a plan to have your debt simply forgiven. The payment terms of the private student loans is something to be very careful of. Government loans can be more flexible when it comes to your repayment methods. Private loans are often not as flexible and may not offer repayment options like income based payments. Private loans may also not allow you to put them in deferment where you let interest accrue but do not make a monthly payment if you are struggling to make payments. However if you are currently making payments on your student loans on the standard 10 year repayment and you feel you can afford the payments, a private loan to lower your interest rate may be a suitable option for you.
What to do now
The best thing you can do in order to develop a proper game plan to pay off your student loans is to first get organized on what types of loans you have. You want to identify if they are federal or private to see what payment options are available to you. From there, you should identify if there are any government programs that you can take advantage of. Regardless of whether you do or not, you should begin to look at interest rates in the private loan market to determine if there are any savings available and weigh that against any benefits of keeping your loans where they are at. If you would like help with this process, I offer a free student loan consultation and analysis. Just click this link below to reach my contact page and send me a message. From there, we can discuss your situation to get your student loans organized .
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