When you were applying for student loans, you had a lot of things to consider. Now that you are paying off those loans there are still a lot of things to be mindful of – none more so than how to reduce the amount of interest you are paying on your loans and how to repay them quicker. There are two options you must consider when paying off your student loans, and you need to understand what these are and the benefits and drawbacks of each. Here is our guide to student loan consolidation to help you decide which repayment option suits you best.



Federal Consolidation

This type of repayment will give you a single monthly payment, plus access to additional payment plans and loan forgiveness programs. This is recommended for those who are struggling to meet their repayment obligations. This type of consolidation is only applicable to federal student loans. The government will combine all your loans into a direct consolidation loan, and will then give you a ten to a thirty-year repayment plan that is based on your total balance. The interest rate you will get is a weighted average of your previous rates, and not by financial history. Some loans that were previously not eligible for loan forgiveness and income-driven repayment become eligible because of federal consolidation.

By opting for federal consolidation to repay your student loans, you gain access to income-driven repayment plans. This means your payments will be tied up to your income, and your balance will be forgiven after 20 to 25 years. You also gain access to public service loan forgiveness programs, which can dissolve your federal loan balance after making 120 payments (10 years) while working in a public service job.

But there are downsides to federal student loan repayment plans. Sometimes, the new consolidated loan term could take longer to pay off, compared to your individual loans’ payment term. For instance, if you have a $10,000 to $19,999 in combined loans you will get a 15-year repayment term when consolidated. This means you will end up paying more interest if you had not had your student loans consolidated. One way round this is to pay your loans faster, or if you are consolidating loans to qualify for income-driven plans to have your loans forgiven. You can also lose loan cancellation benefits for your Perkins loans if you consolidate. If you have multiple student loans, you can consolidate the others while retaining the Perkins loan as it is. Also, it should be free to have your student loans consolidated, so beware of firms who will charge you fees.

Student Loan Refinancing

This is better known as private loan consolidation, which also results in a single monthly loan repayment. This may save you money, but you will have to sacrifice some buyer protections. If you have a stable job, and if your credit score is clean, this may be a good option for you as you could get lower interest rates than you are currently facing. Refinancing covers both federal and private student loans. A lender will pay off all your existing student loans and, in turn, will issue you a new private loan. This is also called student loan refinancing and is credit-based. The new interest rate that the lender will give you will be based on your credit history. The higher the credit score of the student, the lower the interest rate. You can also consolidate both private and federal student loans, but remember that the federal loan will not longer be owned by the government as it is now the lender’s.

Refinancing student loans are beneficial to you if you want to lower the interest rates on your current student loans. Some undergraduate and graduate student loans can face interest rates of between 6.8% and 8.5% interest while some private lenders will offer rates as low as 3.5%. They even have 0.25% discounts for monthly autopay. This method of student loan repayment can also help shorten your repayment term. You will likely be given a range of payment schedules to choose from based on your ability to repay. You can select from five to twenty years, compared to the ten-year federal program. This can help save you money in interest payments since you will be paying for your student loans for a shorter amount of time.

But private consolidation is available only for those with good credit standing. If your credit school is average, or if you have a poor credit score, you should wait until you can improve your credit score or have a co-signer with good credit. The best deals usually require a credit score of 690 and above. If you are refinancing federal student loans, also beware that you will no longer be able to take advantage of income-driven plans or loan forgiveness programs by the government. You will not be able to opt for deferment either. Processing either a federal consolidation or having your student loans refinanced is not that hard to do. For federal consolidation, you can apply online by logging on to your account on studentloans.gov (your Federal Student Aid ID data will be needed). Click on the “Complete a Consolidation Loan Application and Promissory Note” button. If you have the time, you can even pick out a loan repayment plan and student loan officer who you want to work with, and include that information when you process your application online.

For refinancing, you can approach lenders directly. Before visiting their offices, you should give them a call to set an appointment and to inquire about rates, plans, and requirements you may wish to review before you apply for consolidation.


Disclaimer: Our service is not intended to be, nor should it be construed as financial advice. We help our readers make informed decisions via impartial information and guides. Where appropriate, we may introduce partner companies who can provide services relating to financial products.

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