There are two types of student loan consolidation: federal and private. Federal is only for federal student loans. Can I consolidate my private student loans?
There are two types of student loan consolidation: federal and private. Private consolidation is often called refinancing. These processes are often confused, but they are very different. Here’s how:
- Federal Student Loan Consolidation combines multiple federal loans into one federal loan through the Department of Education. Consolidation may be needed to qualify for some federal loan repayment programs, but federal consolidation will not lower the interest rate. It can lower your payments by extending it.
- Refinancing student loans, also called consolidation of private student loans, is a financial movement made by a private lender. If you qualify, you can save money by getting a lower interest rate.
Should I consolidate student loans?
The Direct Consolidation Loan Program is the right choice if your goal is to simplify the repayment process for federal loans and leave open options for many repayment plans available for federal loans. You will not receive lower interest rates. In fact, it may increase slightly. The rate is set on the basis of the weighted average interest on consolidated loans rounded up to the nearest one-eighth of 1%.
If you use private lenders to consolidate student loans, there is a chance that you will get a better interest rate and perhaps lower monthly payments. A small chance, but still a chance. This is due to the fact that federal loan rates are so low – a fixed rate of 4.45% for students, 6% for graduates in 2017-2018 – that it is difficult for private lenders to beat rates and earn.
Student loan consolidation and your credit rating
All federal and private student loans are installment loans and are considered good debt because they are an investment in your future. Having installment loans in addition to revolving loans such as credit cards is great for your credit mix, which accounts for 10% of your creditworthiness.
The best way to improve your credit standing is to make monthly payments on time, and consolidating student loans can help. Consolidation makes student loans easier to manage and easier to track, combining payments into one lower monthly bill. This will reduce the risk of accidentally skipping payments, and a lower payment will help you budget from month to month.
How to consolidate student loans
You can consolidate student loans through many financial institutions, including your local bank or credit union, as well as lenders specializing in this type of loan. Earnest, LendKey and SoFi are among the well-known names in this area.