Student Loan Consolidation and Refinancing

What is Student Loan Consolidation:

Student loan consolidation is the process of uniting some or all of your student loans into one new loan. By consolidating, the borrower would have only one student loan, with one monthly payment, interest rate, and term. People usually consolidate or refinance their student loans to lower and/or simplify their payments.

Student Loan Consolidation and Refinancing: Getting Started

Determine which Student Loan loans you have: Private or Federal
Understand benefits, risks and eligibility for Private and Federal Consolidation
If you want payment flexibility and/or forgiveness consider Federal Student Loan consolidation
If you want to lower your interest rate (and thus lower total amount paid) refinance with a private loan

Can student loan consolidation lower my payment?

Often the answer is YES!

This question will vary by borrower, but the benefits the borrower realizes will heavily depend on the type of consolidation or refinancing they are considering which is contingent on what types of loans they have. Consolidating student loans can be especially helpful to lower payments for those borrowers that:

Have low income (payments can be as low as ZERO dollars/month–learn more here)
Want to take advantage of government forgiveness programs (learn more here)
Have a high interest rate

To figure out what type of consolidation/refinancing is best for you, it’s key to understand the two major 2 types of student loan consolidations:

Both types of consolidations reduce the headache of having to keep track of multiple student loans which can reduce the risk of accidental default, but generally the similarities stop there. In broad terms, federal student loan consolidation can help create payment flexibility (but the borrower must elect to enroll in the correct programs) while private student loan refinancing is typically done to get a better interest rate (being able to lower the rate depends on the rate the borrower got when they received the loans and the current interest rates offered for refinancing student loans).

For those with both private and federal student loans, it is often very beneficial to do both a private student loan consolidation for their private loans and a federal student loan consolidation for their federal loans (Yes, you can do both!).

Federal Student Loan Consolidation Benefits:

Federal consolidations are available to borrowers who have federal loans and are no longer in school. Consolidation is done through The William D. Ford Federal Direct Lending Program, sometimes called Obama Student Loan Forgiveness by the media. Generally speaking, federal loan consolidations are relatively easy to qualify/apply for and have many more beneficial aspects to them than private loans. Federal consolidation are also much easier to qualify for and unlike private consolidations:

Do not require a credit check
Are available to borrowers in default on their loans
Preserves the flexibility of federal direct student loans such forbearance, deferment, and income driven payment options

Further, the federal program has many aspects that can really benefit cash strapped borrowers:

It extends the term of the loan allowing for lower payments (if they have the money, borrowers can prepay with no penalty to keep the interest from piling up)
Allows borrowers to enroll in programs that set the payment amount BASED ON THE BORROWERS INCOME (Read more here). This can keep your payment manageable even if you have low income and provide flexibility should you face reduced income at any point. These programs can often drastically reduce the monthly payment for people with low incomes
Can get some borrowers currently in default out of default (those with wage garnishments are not eligible and must go through student loan rehabilitation first)
For those borrowers that qualify, allows for eligibility for Public Service Loan Forgiveness (after 120 payments)
Offers end of term forgiveness for any unpaid loan balance (this occurs after 20 or 25 years depending on the program)
Allows the borrowers to choose who they want to be their loan servicer (Navient/Sallie Mae, FedLoan Servicing, Great Lakes, Nelnet)

FAQ Regarding Federal Student Loan Consolidation:

What Type of Loans are Eligible?
Only federal student loans can be consolidated under this program.

Can I Consolidate My Student Loans if I am in Default?
Yes, as long as you do not have a wage garnishment against you. Consolidating your defaulted student loans and enrolling in an Income Based Repayment Plan can be a great way to get a “fresh start” and make your student loan situation much more manageable. Those that have a wage garnishment must first go through rehabilitation before being eligible to consolidate.

When Can Loans be Consolidated?
You are typically able to consolidate after you graduate, leave school or are below half time enrollment.

What If I have Already Consolidated my Federal Student Loans?
In this case you cannot reconsolidate unless you have added another federal student loan.

Will my interest rate change?
Federal consolidation does not lower your interest rate, it simply take a weighted average rate of the loans you already have. Because federal consolidation doesn’t change your rate, if you are a highly credit worthy borrower, you may want to consider private consolidation/refinancing.

By Consolidating, Can I take advantage of Income Driven and Forgiveness Plans (If I qualify)?
Absolutely! This is often one of the best reasons to consolidate your federal student loans. Keep in mind though, you are not automatically enrolled into the income driven plans you must choose this option when consolidating (or later on) to take advantage of these. Further not all federal loans are able to enroll in all income driven plans. For example, Parent Plus loans are only eligible for Income Contingent Repayment (not IBR or PAYE).

How do I figure out how to do this?
You can educated yourself about the process and your options and apply for free through the Department of Education. Another option is, you can also hire a private company to assist you with this process. Call 844-653-6936 to talk to a specialist.

For more general information on federal student loan consolidation and detail on what loans qualify follow this link.

Private Student Loan Consolidation (also called refinancing) Benefits:

Unlike federal student loan consolidation, private refinancing can be done for both private and federal student loans.

Much like refinancing a mortgage, generally the biggest benefit of private student loan consolidation/student loan refinancing is a lower interest rate (something federal consolidations do not offer). Over the term of the loan, a small reduction in interest rate can mean big savings to a borrower. These lower rates can be available for a variety of reasons, but typically it is because:

Interest rates have come down since the borrower took out their loans
The borrower has become more credit worthy since graduating (has higher income, better credit score etc.)

Because it is effectively taking out a new loan from a private lending institution (while paying off the old loan), generally private refinancing is much harder to qualify for. As such, typically those that qualify for and/or receive the biggest benefit from private consolidation are credit-worthy borrowers. Currently many lenders who offer student loan refinancing are quoting adjustable rates as low as 1.95% and fixed rates as low as 3.75%.

Student Loan Refinancing Requirements:

Good Credit: Generally it needs to be higher than 660
Good Debt-to-Income Ratio: Generally banks want this to be lower than 40-45%
Proof of stable income (typically more more than $25k/year)

Note: When evaluating your options, keep in mind that once you consolidate federal student loans into a private loan, you CANNOT take advantage of the Federal Direct program. For borrowers with solid financial stability, this may be fine, but those with less financial certainty/stability should consider this.

Private loan consolidations are available through many private lending institutions

FAQ Regarding Private Student Loan Consolidation:

Am I Eligible for a Private Student Loan Consolidation?
Because these are done by private institutions there is no automatic eligibility, but generally you will be judged on your credit worthiness. If you are behind on your loans it unlikely that this will be possible.

Will this Lower My Interest Rate?
This depends on your current rate and your credit worthiness, but if you have a high rate and a good credit score, you likely could have a good shot a qualifying. Here and here are a few sites that can help you with this.

If I am Struggling With My Private Loans are there Forgiveness Programs or Other ways to Reduce My Payment?
There are no forgiveness programs, but some law firms specialize in private student loan relief, Solevio may be able to help you identify those firms that specialize in this. Click here to learn more about those options or please call us for more information.

For more information on private student loan consolidations, please follow this link.

A Word of Caution:
When consolidating your student loans, be SURE you know which type of consolidation you are doing. There are disreputable/scam companies out there who are consolidating borrowers with federal student loans into private student loans without the borrower understanding the implications of this–which can result in you not being able to take advantage of Forgiveness and/or Income Based Repayment programs.