Have you finished your education and started making payments on your student loans? Maybe you took a loan in each of your college years and now have four loans to pay off. Maybe you took a loan each semester and have eight. If you have more than one student loan, you may have wondered if it would make sense to consolidate them into one loan so that you have only one monthly payment to one loan servicer instead of having multiple payments to multiple servicers.
The type of consolidation loan that’s available to you depends on the type of student loan you have: federal student loans or private student loans. You may even have both.
Federal student loans
You can combine some or all of them into a federal Direct Consolidation Loan, which is a program administered by the U.S. Department of Education. A Direct Consolidation Loan will not lower your interest rate but it will lock you into a fixed-interest rate so your payment will never change. The interest rate on a Direct Consolidation Loan will be the weighted average of the interest rates of the loans you are consolidating, rounded up to the nearest one-eighth of a percent. While this formula may slightly increase your interest rate, you benefit from gaining a fixed-rate payment for the remainder of your payment period. You may also be able to extend the repayment period (up to 30 years), which lowers the monthly payment required.
Private student loans
You have the option to combine some or all of your loans into one larger private consolidation loan through a private lender or bank. (You can also consolidate federal student loans into a private consolidation loan; however, consolidating federal student loans into a private consolidation loan has some risks because you will likely lose some protections and benefits that exist only on your federal loans.)
You may benefit from a private consolidation loan if you have excellent credit and you are looking to lower your interest rate, lower your monthly payment by extending the term, or release a co-signer from a loan.
- If you are taking advantage of any of the federal repayment programs, such as the Income-Driven Repayment (IDR) option or the Public Service Loan Forgiveness (PSLF) program, do not combine your federal student loans with private student loans in a private consolidation loan because you would lose those federal benefits.
- If you are on the standard repayment plan for your federal student loans and are NOT taking advantage of any of the benefits of the federal student loan program, it might be worth exploring consolidation to a private consolidation loan if you can get a lower interest rate or more favorable repayment terms with a private consolidation loan. But first be sure you are not giving up any federal benefits you might want to take advantage of in the future.
Only federal student loans can be consolidated using the federal Direct Consolidation Loan; private student loans are not eligible. You can apply for a Direct Consolidation Loan through www.studentloans.gov. For a private consolidation loan, consult your bank or a private lender.
Consolidating your loans can be complicated. We suggest that you speak with your team of financial professionals before making any decisions.
Andrea L. Blackwelder, CFP®, ChFC and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with Wisdom Wealth Strategies.