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What College Students Need to Know About Student Loan Debt Consolidation

Although federal loans have been currently suspended through at least September 30, 2021, due to the COVID-19 pandemic, many students are still burdened by education loans. In fact, the average student loan amount is at $39,351 each for 43.2 million borrowers.

Making student loan payments on time can be easier if you have chosen a private student loan with low-interest rates or have taken on a federal loan. However, if you are having trouble paying off your debt, refinancing private student loans or consolidating federal student loans, can help you reach your financial goals and manage your payments more effectively depending on your current situation.

The Basics of Student Loan Consolidation

For individuals who have trouble paying back their total loan amount, exploring repayment options like debt consolidation and financing can be valid choices. Missing multiple payments can impact your credit score, especially if you can't afford the monthly payment. Instead, making one payment monthly can make it much easier.

However, the best method for borrowers that can afford monthly payments is to go with a standard repayment program, especially as your income increases. This way, you can pay off student debt much faster instead of increasing your loan period. Here are some pros and cons for clients to consider to help them pay off their loan balance:

Pros of Student Loan Consolidation

  • Lower monthly payments
  • Fewer monthly payments to make
  • Can potentially have more flexible payment terms
  • You can release a cosigner from the loan
  • Comes with a predictable fixed interest rate
  • Can protect your credit score

Cons of Student Loan Consolidation

  • Can end up paying more in the long term
  • Can lose advantages of a federal loan including principal reductions
  • Can lose the grace period
  • Can only do it once which can be tough if interest rates fall after you consolidate
  • Interest rates can be higher especially for private loans

Federal Student Loan Consolidation

Multiple federal loans can be combined into a single loan through the Department of Education. As you combine these loans, you'll obtain a fixed interest rate which is based on the average of the interest rates of the loans for consolidation.

The good news is that a Direct Consolidation Loan allows you to consolidate these loans at no application fee through a free application online. Once your it is approved and completed, you'll be able to make a single monthly payment as opposed to your previous multiple payments over several months.

You should consider consolidating your education loans if:

  • You are having trouble making your monthly payment on time
  • You plan to work in a profession that is eligible for student loan forgiveness
  • Managing multiple loans is giving you trouble
  • You have a loan in default

In addition, contacting Federal Student Aid can help you manage your loans, depending on your servicer.

Private Student Loan Consolidation

In contrast to federal loans, private student loan consolidation works through a private lender. It is also known as student loan refinancing. You may able to get a lower interest rate if you meet a lender's list of qualifications.

This process involves combining different educational loans (including both private and federal) into a single plan so that your remaining balance can be made in a single payment. You can potentially gain access to a new interest rate, repayment term, and monthly payment amount for your loans.

You should think about choosing private student loan consolidation if you have:

  • Private and/or federal student loans
  • A credit score of 690 or higher
  • A reliable income
  • You don't plan to use federal student loan forgiveness options since private loans aren't eligible for these

Requirements for Student Loan Consolidation

Although the application process for student loan consolidation can vary significantly across private providers, some of the rules and requirements for Direct Consolidation Loan include:

  • Applying any time after you graduate, leave your school, or drop below half-time enrollment
  • Consolidate an existing consolidation loan with an additional eligible loan in the consolidation.
  • Making repayment arrangements on a defaulted loan before you reconsolidate, or you must agree to repay your new Direct Consolidation Loan under:
  • Income-Based Repayment Plan,
  • Pay As You Earn Repayment Plan,
  • Revised Pay As You Earn Plan, or
  • Income-Contingent Plan

On the other hand, private lenders can have stricter conditions for private student loans compared to federal loans. If you don't qualify on your own, you may qualify with a co-signer who meets these requirements.

Some restrictions for refinancing include:

  • Students who live in certain states
  • Have certain types of degrees, including law or medicine

Frequently Asked Questions

Is it smart to consolidate your student loans?

Consolidation loans offer a way to lower payments every month and get out of default, but they are not always the best option. Interest rates for consolidation loans are fixed so you may end up paying more over time if interest rates go down after your loan is consolidated.

However, it can be worth doing this if other benefits outweigh these potential drawbacks like helping with credit or getting rid of one high-interest student loan altogether.

Will consolidating student loans hurt my credit?

Federal consolidation doesn't incur a credit check, so it won't hurt your credit score. If you qualify for this perk of having no interest on federal loans while in school and the program is available to you, take advantage of it! You will get the freedom to choose between income-driven repayment plans or extended loan payments that might be more affordable than what you're currently paying back each month.

What is the best way to consolidate student loans?

Consolidating your federal student loans with the Department of Education or refinancing private lenders can make it easier for you to pay back debt, but this comes at a cost. If you refinance government-funded loans through a private lender, then there will be no access to income-driven repayment and Public Service Loan Forgiveness programs because they are only offered by the Government Dept.

What credit score do I need to refinance student loans?

Student loan refinancing has never been easier with lenders that have lower requirements. Lenders' minimum requirements range from 650 to 680, so even if you're in the middle of rebuilding your good or excellent scores, there are still a variety of options available for getting back on track!

How do you qualify for student loan forgiveness?

Your student loans are forgiven after you have made 120 payments every month with a qualifying plan.

Your PSLF or Public Service Loan Forgiveness program forgives the remaining balance on your Direct Loans if you work for a public service organization and make 120 qualified payments every month under one of these repayment plans: Income-driven Repayment (IDR) Plan; Pay As You Earn (PAYE); Revised Pay As You Earn (REPAYE).

Before making the decision to adjust your private or federal loan balance and loan term, student loan borrowers should check to see which option is more suitable. While consolidation doesn't impact your interest rate, it can make loans easier to manage.

Comparing different loan refinance companies can help you find the lowest annual percentage rate so you can pay off your balance as fast as possible.

If you're looking for more information on the best student loans to help you finance your education, feel free to read our guide at Any Credit for additional insights.

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