Nearly one in every four American adults carries some form of student loan debt. Close to 45 million people in the United States owe around $1.6 trillion collectively.
College costs are undoubtedly high, with many students forced to take out more than one loan to pay for higher education.
As students accumulate loans, consolidating them into one can make managing payments easier. (Learn More – Student Loan Consolidation)
Whether borrowers are using federal student loans or private loans, consolidation can be done through the respective lenders. (Learn More – Federal vs. Private Loans)
Private student loan consolidation is referred to as a refinance, which can lower your interest rates and the amount you pay overall. (Learn More – Pros & Cons)
To qualify, borrowers typically need good credit, a stable job, and a history of making payments on the student loan. (Learn More – Loan Consolidation Compared to Refinance)
With federal loan consolidation, borrowers can get more time to pay off their loans. While this can lower monthly payments, it won’t decrease the overall amount owed.
The U.S. Department of Education offers federal loan consolidation for free. There are a variety of options for private loan refinancing. (Learn More – Loan Consolidation Providers)
Student Loan Consolidation
The consolidation of student loans is combining all your student loan debt into one loan. If you have multiple loans (and, therefore, multiple payments)t, consolidation can offer some relief, churning out a single, slightly lower, monthly payment.
Once applying for consolidation, the lender will pay off your loans and issue a new one. You will receive a new application and promissory note.
Loan consolidation can lower your monthly payments by extending the amount of time you have to pay the loan off. For example, the initial ten-year loan may be extended to 30 years. However, loan consolidation may not save you money in the long run. While you may have more time to pay the loan off, the principal remains the same, and interest rates may increase.
To be eligible for loan consolidation, you will need to have graduated school, dropped below half-time student status, or have left school entirely.
Once you consolidate your student loans, the old loans no longer exist. You will be issued a new promissory note with new terms, and some of the benefits from your initial loans may no longer be valid.
There are two types of loan consolidation: federal and private.
With federal loan consolidation, the U.S. Department of Education will pay off your loans and issue a new consolidated one for free…
Private loan consolidation is typically called refinancing. It is managed through individual lenders with variable terms.
Rates for Loan Consolidation
If you consolidate your federal student loans with a direct consolidation loan through the U.S. Department of Education, there are no fees. The interest rate is also fixed. They will take the weighted average rate of the loans and then round it up by one-eighth of a percent (0.125%).
Private lenders also offer student loan consolidation — albeit, for a fee — and work with both federal and private loans.
Private loan consolidation is typically done by refinancing your loan, which can lower your interest rate and monthly payment — ultimately saving you money overall. Rates vary depending on your credit score, personal financial factors, and lender. However, rates typically range from 2% to 10%.
Interest rates for refinancing through private lenders can vary and may be fixed or variable. Variable rates are often lower to start, but they can change during the term of your loan. Fixed interest rates are stable and predictable, even if they are sometimes a bit higher initially.
Federal (Consolidation) vs. Private (Refinancing)
Both federal and private loan consolidations have the result of a single monthly payment, but there are distinct differences between the two repayment options.
Through federal loan consolidation (simply known as consolidation), the federal government bundles federal loans into one — for free. Extending the loan term is also possible under federal consolidation, making monthly payments not only easier to manage, but also slightly cheaper.
While this may appear to save borrowers money, it tends to cost them in the long run. Under direct consolidation loans — offered only for federal loans — interest rates typically increase, upping the total cost out-of-pocket.
On the other hand, private lenders offer private loan consolidation (referred to as refinancing), which can include private loans, federal loans, or both. In this case, borrowers must apply for a new loan, be evaluated based on credit history, and accept an offer from the lender. While offers typically have lower interest rates than the initial loans, refinancing federal loans through a private lender means a loss of benefits. Nevertheless, the total required to pay off the new loan will amount to less than that of the initial loans.
Pros & Cons
There are some things to consider when deciding whether or not to consolidate your student loans. Some of the benefits of consolidating include:
- A single monthly payment to one lender instead of multiple.
- Lower monthly payments and a longer time to repay the loan.
- More repayment options and potential benefits, such as loan forgiveness options and income-driven repayment plans.
- Locking in a fixed interest rate as opposed to a variable interest rate.
If you are currently paying off your student loans, or you are in your grace period on a loan, you may be eligible for a direct consolidation loan. Repayment usually starts within 60 days after your other loans are paid off (disbursed) through the consolidation process. You will need to keep making payments on your initial loans until the loan servicer tells you otherwise.
There are a few downsides to student loan consolidation:
- Consolidation can increase your interest rate.
- You will end up paying more out of pocket over the years.
- The outstanding interest you owe on your loans is rolled into the principal of the consolidated loan, with the new interest rate applied on top of that. This increases the total amount of money paid.
- If you consolidate a federal loan through a private lender, your loan becomes private. You will no longer be able to obtain federal student loan benefits or get specific federal student loan consumer protections, like loan forgiveness options.
If you are considering student loan consolidation, be sure to educate yourself on all the specifics. A trained professional can help you determine if it’s right for you.
Impact on Credit
Loan consolidation will not drastically impact your credit, as you will continue to make payments. You are primarily just simplifying your payments.
Initially, student loan consolidation can cause your credit score to dip slightly, as the process may include a credit history inquiry and credit check. Your credit score will usually bounce back within a year or two.
Opening a new account and securing a new loan can also cause your average account age to drop, leading to another slight drop in credit score. However, the impact is minor, and timely payment can counteract the dip.
The process of consolidation may drag your credit score down temporarily, but the benefits of lower, more manageable payments may help raise it in the long run.
Loan Consolidation Providers
If you are consolidating federal loans through the U.S. Department of Education, there are no fees to do so. The interest rates are fixed for the entire life of your loan.
If you are looking for a private student loan consolidation or refinancing lender, there are many options to choose from. The interest rates and terms of your individual loan depend on your specific financial and educational circumstances. The better your credit history and employment stability, the more favorable your loan terms and interest rates are going to be.
Here are some of the top student loan consolidation providers and how they stack up:
- Discover: This financial lender offers credit cards, checking accounts, and student loans through an online-only platform. Ranked as one of the best lenders with no loan fees, Discover offers both fixed and variable interest rate student loans, low loan amounts, and loan terms of 10 or 20 years based on creditworthiness.
Discover also offers student loans with no application fees, origination fees, or late fees. Fixed rates are based on personal finances.
- Splash Financial: This student loan refinance lender operates in all 50 states and offers options for private, federal, and parent PLUS loans. Splash Financial offers both fixed and variable interest rate loans in amounts up to $300,000.
Variable rates start as low as 2.43% APR. Fixed rates start as low as 3.5% APR. Splash Financial does not charge loan application or origination fees.
- Earnest: This lender offers refinancing options for fair credit and approves loans with debt-to-income ratios as high as 65%.
Earnest offers both fixed and variable interest rates as low as 2.37% APR and 3.47% APR, respectively, with a 0.25% discount for enrolling in autopay. You can also customize your monthly payment with Earnest.
- SoFi: This company offers refinancing and student loan options for people with credit scores as low as 650. Approval decisions are made online in minutes.
SoFi provides loans with terms between 5 and 20 years with both fixed and variable options. There are no application fees and even discounts for enrolling in autopay.
With SoFi, you can decide to lower your monthly payments or save money overall. You choose the rate and payment plan that works for you.
- Education Loan Finance: A division of SouthEast Bank, Education Loan Finance offers loans with terms between 5 and 20 years with both variable and fixed interest rates. Education Loan Finance does not charge loan application or origination fees.
Rates for refinancing student loans range from 2.8% APR for a variable interest rate loan to 3.29% APR for a fixed interest rate loan.
- Laurel Road: A division of KeyBank, Laurel Road offers loan consolidation options to both students and parents. They provide the option for a cosigner as well as a cosigner release after consecutive on-time payments are made for a specified amount of time.
Loans are offered with fixed and variable rates for terms ranging from 5 to 20 years. Discounts are available for enrolling in autopay, and there are no loan application fees. Rates start as low as 2.43% APR for a variable five-year loan to 3.5% for a fixed-rate five-year loan.
- CommonBond: With rates starting as low as 2.37% APR, CommonBond offers student loan refinancing options with no loan origination fees or prepayment penalties. They also offer the ability to check your potential rates in minutes online.
- Wells Fargo: This financial institution provides student loan consolidation options as well as relationship discounts, the ability to shift variable loans to fixed interest rate loans, and the option to lower your monthly student loan payments.
- LendKey: Partnering with nonprofit credit unions and banks to offer favorable student loan consolidation options, LendKey uses an online and digital loan platform to offer low-interest loan rates to its consumers.