As student loan debt continues to grow, so do the number of students and graduates seeking ways to make their debts more manageable. The average cost of tuition alone for one year at a four-year in-state university is over $10,000, up from $3,100 in the late 1980s. Though each student’s circumstances are unique, some students may have to take out more than one loan to afford a college education with that price tag.
Though some people are in search of debt relief options, such as loan forgiveness, not everyone is eligible for that kind of assistance. Student loan consolidation is an option available to a variety of people, and though it doesn’t erase your debt, it can make it much more manageable as you pay it off.
But what, exactly, is student loan consolidation? Is it different from refinancing? And is there a different process for consolidating federal and private loans? To ease some of the burdens of paying your debts, here’s what you should know about federal and private loan consolidation.
What Is Student Loan Consolidation?
Student loan consolidation is a process that takes multiple student loans and merges them into one. There are several potential benefits to consolidating your student loans, including:
- One monthly payment: Instead of keeping track of multiple payments, due dates, interest rates, and principal balances, you only have to make and keep track of one monthly payment.
- Paying a lower amount: When you consolidate your loans, you may have the chance to renegotiate your repayment plan. You may be able to reduce the amount you pay each month by extending the terms of your loan.
- Fixed interest rate: If you have more than one loan, it’s likely that they don’t all have the same interest rate. Consolidation ensures you only have one interest rate — which may be lower than your other loans — that is fixed for the duration of your loan.
Federal Student Loan Consolidation
It’s fairly easy to consolidate your federal student loans. Federal loans, regardless of the amount you owe or the number of loans you have, can be merged into a Direct Consolidation Loan. The application for this loan is free and can be completed online.
While most types of federal loans are eligible, not all of them qualify. For instance, Parent PLUS Loans and loans that are in default cannot be consolidated by the federal government. Further, you cannot combine any debt from a private lender into a Direct Consolidation Loan. For more information, or to get started, see the Office of Federal Student Aid.
Private Student Loan Consolidation
You can also consolidate your private student loans, which comes with its own potential benefits. Instead of doing it through the U.S. Department of Education, you consolidate your loans through a bank or other private lender. Perhaps the most notable advantage of private consolidation is that you can oftentimes merge both private and federal loans together, unlike federal loan consolidation.
The terms of private loan consolidation can vary based on several factors, including your credit score. For example, if your credit has greatly improved since you first took out your loans, you may be able to secure a better interest rate (or other terms) by consolidating your debt with a private lender. Eligibility requirements and qualifying factors also vary from lender to lender, so be sure to reach out to lenders directly for more information.
Can You Consolidate Private and Federal Student Loans?
You can consolidate both private and federal student loans, but only through a private lender. Remember, the federal government does not consolidate private loans. However, you should carefully consider the pros and cons of merging both your private and federal student loans.
Some federal loans have certain protections and advantages that private loans do not. For example, if you work for the government or as a teacher, you might be eligible for the Public Service Loan Forgiveness Program (PSLFP) or Teacher Loan Forgiveness Program (TLFP), which can eliminate your debt entirely after a number of years, depending on the program. You forfeit these and other benefits if you consolidate your federal loans with your private loans.
Where Does Refinancing Fit Into This?
Though they are similar, loan consolidation and loan refinancing are not the same processes (though you may hear people refer to refinancing as private loan consolidation). Student loan refinancing is actually a type of student loan consolidation where you take out a new loan in order to pay off your other existing loans.
When refinancing, you also have the opportunity to renegotiate the terms of your loans, which can lead to a lower interest rate, shorter repayment plan, and even the chance to release a cosigner from your loan. You can also refinance both private and federal loans.
You have a lot to consider when it comes to consolidating or refinancing your loans. Depending on the current health of your finances and the terms of your repayment plans, it may not make sense to combine them. However, if you’re looking to simplify your payments or negotiate new terms to your loans, student loan consolidation might be the best choice to manage your debt.