Updated: Apr 06, 2023
Managing your finances can feel a lot like a juggling act. And when you’ve got multiple loans from various lenders, with different payment due dates and interest rates, it can feel like it’s only a matter of time before you drop the ball. Consolidating your loans can help you better manage them, so you can work toward paying them off. And in some cases, you may even be able to lower your interest rate or your monthly payment. Here, you’ll find the answers to your consolidation questions.
What are the benefits of consolidating student loans?
- Consolidating your loans can help you better manage your loans by combining them into a single loan to pay each month. You may be able to extend the duration of your loan and/or lower your interest rate which can reduce your monthly payment.
- A Direct Consolidation Loan allows you to combine federal loans into one and gives you the option to repay it over a longer period of time, which lowers monthly payments.
- A private consolidation or refinance loan is a loan from a financial institution like a bank or credit union that typically allows you to combine federal and private loans into one. It may be able to offer you a lower rate than you’re currently paying.
What is a student loan consolidation?
Fundamentally, a consolidation loan is a way to combine multiple loans into one, new loan. That new loan pays off your old ones, and you’re left with a single loan for the total amount of your unpaid debt, with one monthly payment. The details of student loan consolidation vary based on the kind of loans you have (i.e., federal, private, or a mix) and the type of consolidation loan you get (i.e., federal or private).
What’s the difference between federal and private student loan consolidation?
If you have multiple federal student loans, you can apply for a Direct Consolidation Loan, which is a program that allows you to combine these loans into one. The interest rate on this new loan will be a weighted average of the old loans, and you’ll have the option to repay your loan for a longer period of time (up to 30 years), which will lower your monthly payments.
There are some downsides to consider. When you extend your loan repayment, you end up paying more in interest over time. Any outstanding interest on your existing loans will get capitalized, which means that it’ll get added to the principal, or original amount of the loan. In other words, future interest charged on your new loan will be based on a higher principal amount. Additionally, you may lose some benefits to your existing loans, such as progress toward student loan forgiveness.
A private consolidation or refinance loan is a loan from a financial institution like a bank or credit union, and it typically allows you to combine federal and private loans into one. Unlike the Direct Consolidation Loan, a private consolidation or refinance loan may be able to offer you a lower rate than you’re currently paying—which would lower your monthly payment. But if you extend your repayment period, then you could end up paying more in interest, even with a lower rate. It helps to do the math when considering this option. It is also important to note that if you consolidate federal loans into a private consolidation loan, you’ll lose benefits associated with those loans.
How do I consolidate my student loans?
To apply for a Direct Consolidation Loan, you’ll need your FSA ID, some personal information, and financial information, much of which you can find by logging in to your federal education loan account. You do not need to undergo a credit check.
For a private consolidation or refinancing loan, you’ll have to choose a lender and then follow their application instructions. You will have to consent to a credit check.
So I consolidated my loan. What now?
Now that you have a single payment due each month (and perhaps even a lower monthly minimum to pay), the repayment process can be easier to manage. To stay on top of your finances, work out a rough budget for yourself that includes your new monthly payment. If you can, work a slightly higher number into your budget and pay off more than the minimum payment each month, or throw some extra money toward your loan when you have it, as it can get you to the finish line faster and save you money on interest. Either way, a life free from student loan debt is on the horizon.
