Student loan debt can be a burden on your finances and your mental health. But there’s good news student loan consolidation can help simplify your repayment plan and save you money.
In this ultimate guide to student loan consolidation, we’ll walk you through everything you need to know about consolidating your student loans. It includes the benefits, the risks, and how to apply.
By the end of this guide, you’ll be equipped to make an informed decision about whether student loan consolidation is right for you.
So, let’s get started!
Table of Contents
What Is Student Loan Consolidation?
Student loan consolidation combines all your eligible student loans into one new loan with a fixed interest rate and may extend the repayment term (or the amount of time you have to repay the loan).
This may also lower the monthly payment and simplifies the repayment process because you only have to make payments to one company.
A Consolidation Loan is designed to help student and parent borrowers simplify loan repayment by allowing the borrower to combine several types of federal student loans with various repayment schedules into one loan.
If you have more than one loan, a Consolidation Loan simplifies the repayment process because you make only one payment a month.
Also, the interest rate on the Consolidation Loan might be lower than what you’re currently paying on one or more of your loans.
And if you’re in default on a federal student loan, you might be eligible for a Consolidation Loan if certain conditions are met.
Loan consolidating can be very confusing. Postcards that come in the mail saying “Consolidate Now!” can make it seem like a brainless endeavor, but what loan consolidation actually means to your finances, in the long run, is a puzzle to many people.
Loan consolidation is when several different loans are paid off by one vendor, who opens a new loan. This new loan allows you to pay just one bill instead of several different loans, possibly, from several different lenders.
There are benefits to consolidating debt, but there can be drawbacks, too. Depending on your own situation, you will need to discover whether consolidating loans or keeping loans separate is the best way to go.
But don’t wait until sometime down the road to consolidate. If you decide that consolidation is the best option for you, do it now.
Benefits Of Student Loan Consolidation
One benefit of loan consolidation is the simplicity of paying one monthly bill and knowing that all your debt is through one financial lender.
There is no need to have seven different addresses and banks, to which you must keep up and send out bills on a monthly basis. The monthly payment is usually much lower on consolidated loans than on individual loans.
If you decide to consolidate, they will take all your loans together and then give you a few options on how fast you want to pay them back.
If you are still struggling with getting a job, then there are options that take this into account. For example, you can pick an option that has a smaller monthly fee for the first couple of years while you get started on your career. Then the monthly fee increases on the assumption that you will have your finances in order and be making more money than you had been when you had just graduated.
While this is great for students who are young and have very little income coming in, many students going back to college may have a spouse to help them repay their loans.
If you can afford to pay a higher monthly payment for your student loans each month, you should. That way you can pay off your balance sooner and avoid paying more interest than you have to. Consolidated loans also allow you to pay more than your monthly balance without incurring fees.
So if you have extra money one month, say your income tax refund, you can apply it to your student loans and pay the debt off quicker. And the best thing about loan consolidation is that you can generally get a lower fixed rate for your consolidated loans than on individual loans.
A fixed-rate means that they won’t increase your rate later on as inflation rises. This generally works in your favor, since rates tend to increase as time goes on.
How Student Loan Consolidation Works?
But before you begin you must understand how the student loan consolidation process works. Here is how it works in simple terms.
How long does it take to process a Consolidation loan?
It typically takes four to six weeks, although many loans can be completed in two to four weeks or can take as long as 12 weeks.
How long will I have to repay a Consolidation loan?
The term of the Consolidation loan will depend on what the principal balances of your loans are at the time they are consolidated. The higher the balance, the longer the term. The minimum repayment term is 10 years and the maximum is 30 years. The minimum monthly payment is $50; therefore, if you have a low principal balance, your loan may pay off in under 10 years. There is no penalty for paying your loan off early.
Can I consolidate a defaulted loan?
Loans that have defaulted may be eligible for consolidation as long as certain criteria are met, which are:
The holder of the defaulted loan must certify you have made satisfactory payment arrangements on the loan(s). Satisfactory payment arrangements, at a minimum, consist of three full, consecutive, voluntary, on-time payments prior to applying for a Consolidation loan.
The defaulted loan cannot be subject to a judgment or an order of administrative wage garnishment.
If there is a judgment or garnishment on the loan, the judgment must be vacated or the garnishment order must be lifted for those loans to qualify for consolidation.
What will my interest rate be?
The interest rate on your Consolidation loan is set according to federal law; it is the weighted average of the interest rates of loans being consolidated, excluding Health Education Assistance Loans (HEALs), rounded up to the nearest one-eight percent. The rate is fixed for the life of the loan and cannot exceed 8.25%.
What is a weighted average?
The weighted average is determined by the current balance and the current interest rate of each loan that is being consolidated. The higher the balance, the greater “weight” is placed on the interest rate of that loan.
How can I benefit from consolidating my student loans?
Depending on your loan balance, you may have a longer term to pay off your Consolidation loan, which could decrease your monthly payment to a more manageable amount. Keep in mind, the longer it takes to repay your loans, the total interest costs will increase.
Eligibility Requirements
Though eligibility requirements may vary depending on the lender and type of loan program, generally speaking, you are eligible to consolidate your student loans if:
- Your Federal Student Loans total at least $10,500.
- You have not previously consolidated, left a loan out of the consolidation, or taken out a new loan more than 180 days after the consolidation.
- You have multiple lenders or a single lender who will release the loans.
- Note – if you are in default you must complete a rehabilitation program before you can consolidate.
- You are currently not in school, or you are leaving school in the next 6 months.
Eligible Loan Types can include :
- Federal Subsidized and Unsubsidized Stafford Loans
- Federal Direct Subsidized and Unsubsidized Stafford Loans
- Federal Perkins Loans
- Federal Plus Loans
- Federal Direct Plus Loans
- Federal Supplemental Loans for Students
- Health Professions Student Loans – HPSL
- Federal Insured Student Loans – FISL
- Federal Nursing Loans – NSL
- Federal Consolidation Loans
- Federal Direct Consolidation Loans
How do you Save Money with Consolidation?
When you consolidate your student loan, you can reduce your interest rate by a significant amount. Consolidate your existing student loans, make one payment each month, and keep more cash! Examples of possible savings*:
| Total Loan Amount | $15,000 | $25,000 | $40,000 | $60,000 |
| Current Monthly Payment | $174 | $300 | $475 | $693 |
| Consolidated Monthly Payment | $135 | $205 | $296 | $394 |
| Total Monthly Savings | $39 | $95 | $179 | $299 |
* All examples are estimates only. Please consult with your Loan Counselor to determine what your actual consolidation savings will be.
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