If you are one of the over 44 million borrowers in the United States with over $1.48 trillion in outstanding loan debt, you might be looking for some relief. Many borrowers look to consolidation and refinancing as a way to reduce the number and cost of monthly student loan payments. Consolidation and refinancing, however, are not the same thing. Refinancing allows you to pay off existing student loans, both federal and private, with a new loan through a private lender. When you refinance, however, you lose some of the benefits associated with federal student loans. Consolidation is a process by which you combine all of your existing federal student loans into one new loan with one monthly payment. Private loans cannot be included in a student loan consolidation.
How to Consolidate Your Student Loans
Federal student loan consolidation is available through a government program known as a Direct Consolidation Loan. You can go to studentloan.gov and fill out the application for a Federal Direct Consolidation Loan. You’ll pick the loans you want to consolidate and select a new repayment schedule. Your consolidation loan is a new loan, so your new servicer will pay off your existing loans and send you information about how to make payment on your new consolidation loan. If you were making several payments a month to different federal student loan servicers, you’ll now make a single payment to the one new lender.
Three Things to Consider Before Consolidating Your Student Loans
- Consolidation may not reduce your monthly payment: When you consolidate your federal student loans, the interest rate on your new loan is computed as the weighted average of the interest rate on each of the loans you include in your consolidation. So, you won’t really save any money by lowering your interest rate on a consolidation. The only way you can actually reduce your monthly payment is by choosing a repayment term that is longer than what you had on your existing loans.
- Consolidation may not reduce your cost of borrowing: Since your new loan interest rate is the weighted average of your existing loan interest rates, you won’t reduce the interest expense when you consolidate. You can, however, reduce your cost of borrowing by choosing a repayment term shorter than the ones you had on your existing loans. Reducing the payment term will increase your total monthly payment, but it also means you’ll pay less interest over the life of the loan. Plus, you’ll be free from your student loan debt faster.
- Your consolidation loan is still eligible for the same benefits as your original federal student loans: If you are interested in getting your student loans repaid as part of a public service loan forgiveness program, your direct consolidation loan is still eligible for these programs. Also, borrowers still have access to federal deferment and forbearance provisions. These benefits give borrowers experiencing financial or other hardship the opportunity to pay only interest or even defer their payments entirely for a short period of time.
Overall, it is a good idea to consider a federal loan consolidation. You will reduce the number of payments you have to make each month. In addition, you’ll reduce the number of accounts you have to manage if you move, switch banks, or otherwise need to change your account information. Consolidation might not reduce the cost of your monthly student loan payments, but there are still benefits to borrowers. Plus, there is no cost to consolidate your student loans.
