How to Consolidate Your Student Loans and Save Money
As college costs continue rising, many graduates face significant student loan debt. One strategy that can help manage and reduce your student loans is consolidation. Here is a guide on how to consolidate student loans and save money:
Determine eligibility
The first step is to confirm you have federal student loans that are eligible for consolidation. Generally, most federal direct loans, PLUS loans, and FFEL loans qualify. Private student loans usually cannot be consolidated. Run your full federal loan profile to assess eligibility.
Compare consolidation options
There are a few avenues for federal consolidation – a Direct Consolidation Loan with the Department of Education or consolidating through private lenders. Compare terms, fees, protections, and repayment plans to choose the best option for your situation.
Apply to consolidate
Next, complete the application through the lender you select. You’ll need personal information, your loan accounts, servicer details, and references. The consolidation lender will pay off and bundle your existing loans into one new loan.
Select an ideal repayment plan
One key benefit of consolidation is getting to choose new loan repayment terms, usually based on loan balance, income, and loan term. Options include standard, graduated, extended or income-driven plans. Pick terms affording comfortable payments.
Leverage lower interest rates
If you consolidate variable-rate loans or older fixed-rate loans, you may be able to lock-in a significantly lower fixed interest rate on the consolidation loan. This lowers the total interest you pay over the life of the loan.
Simplify loan servicing
Rather than making multiple loan payments to different servicers each month, you’ll have just one payment to the consolidation lender. This simplifies the repayment process into a single track. Autopay can ease the process further.
Gain access to protections
Through federal consolidation, borrowers regain eligibility for hardship deferments, forbearances, and income-driven plans. This provides options if you’re struggling to make payments due to unemployment, disability, or other factors.
Potentially lower monthly payments
Based on the loan terms you qualify for, consolidation can provide more affordable monthly payments extending repayment terms. Just be mindful this increases your total interest costs over the long run.
Improve credit through on-time payments
As long as you consistently make on-time payments on the consolidated loan, this positive payment activity helps build your credit history. This improves scores over time as you demonstrate responsibility.
Consolidating student loans simplifies repayment, can secure a better interest rate, and makes managing student loan debt more convenient. Weigh the pros and cons for your situation to determine if consolidation is a sound financial move.
Consolidating student loans can simplify repayment combining multiple loans into one. To save money, consider these steps:
Understand Your Loans: Know the types of loans you have, their interest rates, and terms.
Federal Loan Consolidation: For federal loans, consider Direct Consolidation. It averages the interest rates of your loans, rounded up to the nearest one-eighth percent.
Private Loan Refinancing: Explore refinancing with private lenders for potential lower interest rates. This is not applicable to federal loans as it involves taking out a new loan.
Compare Interest Rates: Shop around for the best interest rates and terms. A lower interest rate can lead to significant savings.
Extended Repayment Plans: Choose an extended repayment plan if needed. While this lowers monthly payments, it may result in paying more interest over time.
Income-Driven Repayment: For federal loans, consider income-driven repayment plans that adjust payments based on your income, potentially lowering monthly amounts.
Maintain Subsidized Loan Benefits: If you have subsidized loans, be cautious about losing interest subsidies through consolidation. Evaluate the impact on your overall cost.
Check for Prepayment Penalties: Before refinancing, ensure there are no prepayment penalties, allowing you to pay off the loan early without extra fees.
Always weigh the pros and cons, considering individual circumstances, before consolidating or refinancing.
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How to consolidate your student loans
Written Melanie Lockert; edited Richard Richtmyer May 25, 2023, 4:58 PM GMT+1
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Combining multiple student loans can make paying them more manageable and potentially save you money.
If you have federal student loans, you can apply for a Direct Consolidation Loan through the government.
For private student loans, you can refinance them through a private lender, ideally at a lower interest rate.
Keeping tabs on multiple student loans can be tough. One solution is to consolidate them.
When you consolidate your student loans, you merge all of your loans into one. This helps simplify repayment so you have a single loan and one monthly payment.
See Insider’s picks for the best lenders to refinance student loans >>
How to consolidate student loans
1. Take an inventory of your student loans
The first step in the process is to take an inventory of your student loans.
How many student loans do you have?
Who are your loan servicers or lenders?
Do you have federal loans, private loans, or both?
2. If you have federal loans, look at Direct Consolidation Loans
If you have federal student loans, you can consolidate your loans with a Direct Consolidation Loan, which allows you to consolidate your loans after you graduate. There is no fee to apply, and you can do it online through StudentLoans.gov.