Student loans provide you with a convenient way to pay for your college education. Many students will take out new loans each semester to fully pay for their education, and the result is that you may have six, eight or more loans to keep track of and to pay for. Consolidating your loans is a great way to better manage this debt. It may give you just one student loan payment to manage, and it also may result in more affordable payments, faster debt reduction or other benefits. There are two main types of student loans, and these are private and federal student loans. With a closer look at the differences between consolidating these two types of education loans, you can determine your best course of action.
What Are the Differences Between Federal and Private Student Loans?
A federal student loan is one that is issued by the government, and a private student loan is issued by a third party financial institution, such as a bank. Most federal student loans have a low interest rate and are tax deductible. The payments often are not due until several months after you graduate or leave school. Private student loans have interest rates based on your credit rating, and they are not always tax deductible. In some cases, you may be responsible for making payments while you are in college. Consolidating both types of loans generally offers substantial benefits, but keep in mind that you often need to refinance your federal student loans separate from your private student loans in order to maintain the tax deduction status.
Consolidating Federal Student Loans
You can consolidate your federal student loans through the Department of Education, so avoid paying a third party for their consolidation services. The interest rate offered through the Department of Education is set across the board, so you will not reduce your interest rate by consolidating. You will have a single loan payment to manage, and you can choose between a 10 and 30-year term length. This gives you greater flexibility to manage your debt reduction schedule and to control the amount of your monthly loan payment. You can easily request a consolidation loan through the studentloan.gov website. The application will take approximately 30 minutes to complete. You can choose to consolidate some or all of your current loans and can choose your loan term, loan servicer and payment plan through this process.
When Consolidating Federal Student Loans Is Not Wise
In addition to enjoying improvement loan payment management, consolidation may also qualify you for special debt forgiveness plans when you consolidate your loans. However, there are some instances when loan consolidation is not a wise move to make. For example, if you choose to extend your repayment term to enjoy lower monthly payments, you will essentially be adding more interest onto the loan over its entire life. This can make it more expensive to pay the loan off over the long run. In addition, unpaid interest on your current loan will be rolled over as principal on your new loan. This can add to your total debt liability. You should also pay attention to debt forgiveness requirements. For example, some forgiveness programs require you to make the first 120 payments before the debt can be forgiven. If you consolidate, any previous payments you have made will not be counted toward this, and you essentially will need to start the count over.
Consolidating Private Student Loans
When you consolidate private student loans, you are typically doing so through a bank or private financial institution. These are often credit-driven programs, so your credit rating will be reviewed. If your credit rating has improved since you originally applied for your student loans, your interest rate may decrease. Many students have lower scores than those who have graduated and have stable income from a full-time job, so there is a good chance that you can qualify for a better rate. You can research bank loan programs to find the right program to use, and you can walk through that lender’s refinance process.
While consolidating student loans is a great idea for some, it is not advisable for everyone. You can easily explore the options today as a first step toward determining if this is the right move for you to take.