Student Loan Consolidation Basics

Student loan consolidation is a relatively easy concept to understand: it is the process of taking multiple student loans and combining them into one. Another term for this is Refinancing. Before consolidation, a student borrower might have multiple loans to pay back and many different loan balances to track. After consolidating his or her loans, a student borrower will have just one monthly payment and just one loan balance to maintain.

The decision whether or not to consolidate can be tricky. There are many different factors for students to consider in order to ensure that they’re making the right choices for their families and their wallets. These are just a few of the issues to keep in mind when students, or former students, are contemplating consolidation.


Consider Loan Consolidation

Federal and Private Consolidation

There are federal and private student consolidation loan programs. Only federal student loans can be combined into one federal consolidation loan. If you are looking to refinance private loans, please take a look at our private loan refinancing options.

Federal consolidation is available after borrowers enter repayment, either because they graduated or ceased to be enrolled at least half-time. The interest rate for federal consolidation loans is the weighted average interest rate of the loans being consolidated, rounded up to the nearest one-eighth of 1%.

Example:

Loan A: $5,000 at 6.8%

Loan B: $10,000 at 6.0%

Consolidation Loan: $15,000 at 6.375%

Here is why:

  • The amount you owe on each loan is multiplied by its respective interest rate (5,000 x 0.068 = 340; 10,000 x 0.06 = 600).
  • These amounts are then added together (340 + 600 = 940).
  • This total is divided by the total amount you owe (940 / 15,000 = 0.063).
  • Multiplied by 100, this number creates your weighted average interest rate (100 x 0.063 = 6.3).
  • Your weighted average is then rounded up to the nearest 1/8% percent (6.3 + 0.075 = 6.375).

Source: American Student Assistance

student-loan-consolidation-calculation

In contrast, private consolidation loans may be based on a variable or fixed interest rate based on the applicant’s current credit score, or income-to-debt ratio, and other factors. Private consolidation rates are based on market conditions. In other words, if interest rates fall below those of the original borrowed funds, consolidation can result in a lower interest rate. Approximately 7 banks offer private consolidation loans, according to Bloomberg. Typically only people who have a sterling financial profile with no financial mishaps are able to consolidate their private loans.


Benefits of Consolidation

When most people think of student loan debt, they think of younger students who are either in school or young people who have just graduated and entered the job market. In reality, the age of the average student loan holder is much different. In fact, 60% of borrowers are over the age of 30.

Source: Federal Reserve Board of New York

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credit-history

Since so many loan holders are older, it’s possible that they have good credit scores. After all, as they’ve aged, these consumers have likely developed an extensive credit history, made up of a variety of different payment history factors, such as car loans, credit cards, personal loans, and mortgages. This kind of solid payment history could allow older borrowers to get excellent loans in the private marketplace, and they might save a bundle of money in the process. While some might want to consolidate private loans due to the potential financial benefits, others might want to consolidate their loans in order to avoid default.

  • $1 trillion in loan debt
  • $214 billion in deferment or forbearance
  • $89 billion in default

Consolidation may not make student loan debt go away, but a consolidated loan will usually have a smaller monthly payment that is easier for a borrower to pay. Having a more manageable monthly payment, in turn, should help borrowers avoid entering into default.

If that monthly payment were easier to make, perhaps fewer borrowers would land in hot water with their lenders. In addition, consolidation could allow consumers to focus on the other forms of debt that eat away at their monthly budget, such as credit card payments. The Federal Reserve calculates that average household has over $15,000 in credit card debt. This kind of debt can keep people from achieving their dreams, and the interest rates on credit card balances are often prohibitively high. A consolidation loan may provide wiggle room in the family budget, which could allow that family to pay a little more on their credit card debt each month.
credit card debt

A Few Drawbacks

While consolidation loans can be wonderful tools for some families, other families may find that they’re in better shape with the loans they already have. This might be due, in part, to the difference in interest rates between standard student loans and consolidated loans. For instance, the interest rates for Federal Direct Loans in 2016-17 are 3.76%, whereas some private refinance loans are 7.00% or higher.

That’s much higher than the rate students might be paying for their original loan, and that could add up to huge expenses over the life of the loan. Even if the interest rate doesn’t change, consolidating might mean extending the life of the loan, and that could also be costly. Forbes demonstrated this concept in the following way: Extending a payment plan could also mean paying back a loan during a time at which people are in the midst of their peak earning capacity. Statistics from the U.S. Census Bureau as reported by dshort.com suggest that earning capacity tends to follow a curve that looks like this:
true-cost-of-a-student-loan

earning-potential-by-age
Consolidating a loan means smaller monthly payments, but it will usually result in paying more over the total life of the loan, though those payments will at a time when people are at their peak earning capacity. Additionally, most consolidation loans allow for prepayment, so if you are able to make extra payments ahead of time, you can save on interest costs over the total life of the loan.

What You Give Up By Consolidating

Students who consolidate their loans may also give up a significant number of very valuable benefits that came with their original loans, including:

  • Balance forgiveness options
  • Deferred repayment opportunities
  • Many repayment options
  • No penalties for early payments

But some students may find that the benefits are so great that they simply cannot be denied. For students like this, consolidation may be a gift that’s just too hard to overlook.

Pretty young lady taking a decision with scale above her head

Whatever your financial situation, it’s important to carefully evaluate your repayment options before taking action one way or another. If you’re considering consolidating your student loans, whether federal or private, take the time to run some numbers and make sure that you know the financial implications of what you might do. If you’re ready to begin the process of private loan consolidation, look at and compare our partners’ offers.


Eligibility requirements for consolidating your student loans

There’s a good chance you are eligible for a federal consolidation loan. Requirements vary by each lender, so check with them for more information on their fine print. Here are some general guides for eligibility:

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  1. You have any of the qualifying federal loans that are listed below.
  2. You have total outstanding federal education loan balances of $7,500 or greater. This amount can vary from one lender to the next, and some lenders will consolidate lesser amounts.
  3. None of your existing student loans are in default. If you are in default on a loan, you first need to make repayment arrangements with your lenders before they will consider consolidating them.
  4. You are no longer enrolled. In other words – you must have graduated or dropped below half-time.

Just about any federal loan – whether from the former Federal Family Education Loan (FFEL) program or the Federal Direct Loan program – can be consolidated. Private student loans that come from private lenders such as banks and are not subsidized or guaranteed by the government cannot be consolidated under federal loan consolidation guidelines. You can, however, consolidate your private student loans into private refinance loans.

Also, if a student took out loans in his or her name, those loans cannot be combined in a consolidation loan with loans that a parent took out for the student. If the borrowers are different, the loans have to stay separate.

Almost any federal education loan can be consolidated, including the following:
  • Subsidized Federal Stafford Loans (SS)
  • Unsubsidized Federal Stafford Loans (US)
  • Federal Parent Loans for Undergraduate Students (PLUS)
  • Federal GradPLUS Loans
  • Federal Supplemental Loans for Students (SLS)
  • Federal Perkins Loans (PERK)
  • Nursing Student Loans (NSL)
  • Health Education Assistance Loans (HEAL)
  • Auxiliary Loans to Assist Students (ALAS)
  • Health Professions Student Loans (HPSL)
  • Federal Insured Student Loans (FISL)
  • Guaranteed Student Loans (GSL)
  • Federal Unsubsidized Consolidation Loans (UCON)
  • Federal Subsidized Consolidation Loans (SCON)
  • Federal Direct Subsidized Student Loans (DSS)
  • Federal Direct Unsubsidized Student Loans (DUS)
  • Federal Direct Consolidation Loans (DCON)
  • Federal Direct Parent Loans for Undergraduate Students (DPLUS)
  • Federal Direct GradPLUS Loans

Frequently Asked Questions
Why and how to consolidate student loans?If you have multiple student loans and the repayment schedule is beyond your capacity to handle, the best way to make repayment more manageable is to consolidate the loans. Consolidating student loans is a simple process, and assistance is offered by all federal loan servicers. If you have federal loans to pay off, you can pursue consolidating federal loans, whereas if you wish to consolidate your private loans, you can choose any private lender who will refinance your loans.

What is the benefit of consolidating student loans?

Consolidating student loans offers students the opportunity to reduce all of their existing loans of one type (meaning federal or private) into one loan. This means you only have to make one monthly payment at one interest rate instead of a number of payments at different dates.

What are some of the disadvantages of student loan consolidation?

Depending on the rates of your federal loans, it is highly possible that the consolidated student loan rate will be higher than the interest rates on your other loans. Furthermore, If you have already paid off a significant amount of your student loans, consolidation may no longer be worth it.

Can I re-consolidate a federal consolidation loan?

The only way you can re-consolidate a federal consolidation loan is by adding a new (or otherwise not already consolidated) federal loan. Therefore, if you have already consolidated your loans once and now have a new loan that was not part of the original consolidation, you can re-consolidate the loans.

Keep in mind that the rate on your re-consolidated loan will be different than that of your original consolidation loan. Remember the existing consolidation is considered a single loan, so the new re-consolidated loan’s interest rate will be equal to the average of existing consolidation loan and all the newly added student loans, which is then rounded up to the nearest 1/8 percent.


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