The two ways to consolidate student debt


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Ask a Lender
May 16, 2017 | Updated September 25, 2017


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Key Points

The basics of consolidating student loans

  • Student loan debt can be consolidated through the U.S. Department of Education or through banks and private lenders.
  • The Department of Education only consolidates federal student debt, but private lenders consolidate private and federal loans.  
  • Student debt consolidation can lower monthly payments by extending the loan term, but won’t necessarily save money in the long run.
  • It is important that ex-students evaluate what special perks they may lose when rolling their debts into a single loan. 

Student loan debt has become a big problem. Not only are college students often saddled with thousands of dollars of debt once they leave school, many times they have several student loan debts that individually need to be paid down each month.

In a situation like this, former-students often find it harder to manage their monthly bills, and look to consolidate their debt.

With college debt, there are two main mechanisms of consolidating loans. These are through the U.S. Department of Education, or through private banks and lenders. If you have a combination of federal education loans and private education loans, it can be a challenge to roll them into one loan.

Consolidating federal student loans

The Department of Education’s debt consolidation program, which is the primary method of consolidating federal education loans, won’t allow private education loans to be consolidated with federal loans. Almost all types of federal loans can be combined, though.

The online application process is relatively quick and easy, although you should gather up all the needed information beforehand. There is no fee to apply. 

If you have been struggling to pay multiple federal student loans, rolling all those debts into one payment can help. Your consolidated monthly payment may fall because the term of the loan can be extended up to 30 years.

There are some downsides, however.

A federal direct debt consolidation typically won’t save you any money in the long run on interest, however. In fact, the opposite is true. Because the loan terms are usually extended, you will likely pay interest for a longer period, and so the overall amount you pay over the life of the loan could rise significantly.

The consolidation also won’t reduce interest rates. Your new fixed interest rate will become the weighted average of your previous rates, rounded up fractionally.

By consolidating your federal education loans, you could also lose some of the perks of the individual loans, such as interest rate discounts, principal rebates, or some loan cancellation benefits. Rather than consolidating, it may sometimes make more sense to seek a deferment that allows you to temporarily stop your payments, or switch to a new, income-driven payment plan. Before you go forward, you should weigh the costs and benefits of consolidating carefully.

Consolidating private loans

The other major debt-consolidation option is refinancing through a bank or lender. By going this route, people with good credit, a solid income and marketable degree with a lot of upside on earnings, can potentially lower the interest rate and save money.

Banks and lenders, though, are looking closely at the risk. To qualify, you will need a solid credit score. Your education, job and other factors will be considered to determine the cost of the loan.

If you qualify for a lower interest rate, you can potentially save a significant amount of money over the length of the loan, particularly if you are consolidating higher-interest private student loans. One thing should be noted, though. Federal education loans typically carry lower interest rates than private loans. It can be challenging to find a better rate through a bank or lender. If you are consolidating federal student loans with a private loan, you will also lose any of the perks of those programs.

Some lenders also charge origination fees that can add several hundred dollars to the loan. In some cases, however, banks will waive these fees when refinancing student debt.

The bottom line is that consolidation can make sense, and you will have some options. If you are looking to consolidate, though, it is worth your time to closely evaluate all your options.


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