How to Consolidate Student Loans in 2023
Do you feel burdened by your debt from student loans? If so, you may want to think about refinancing or combining your debts to get lower monthly payments. That might frequently be a wise financial decision. But it pays to carefully consider the benefits and drawbacks before opting to consolidate or refinance.
Federal student loan payments, including principal and interest, are presently stopped as part of the COVID-19 emergency relief. The collection of unpaid or defaulted federal student loans was halted by the Department of Education.
The garnishment of wages has also been suspended, as well as any reduction of tax returns and Social Security payments. An expiry date was specified for this relief, but it has been repeatedly postponed. The earliest of these two dates is now selected as its expiration date.
The Department of Education and former President Trump implemented the suspension of loan payments as part of the pandemic response that started in March 2020.
Your monthly payments may be reduced if you combine or refinance several high-interest private student loans with another private lender.
Federally guaranteed student loans are not currently being repaid.
Consolidating your federal student debts through the Direct Loan Program of the government may be another choice if you have any.
Some of the unique advantages that federal loans have to offer will be lost if you consolidate them into a private loan.
How Does Consolidating Student Loans Work?
Your student debts can be consolidated in one of two ways. The federal government or a commercial lender are two options. Federal consolidation is only available for federal loans.
When you refinance your private or federal student loans, a private lender like a bank pays down your debt. This process is known as private student loan consolidation.
You are then given a new loan with a new interest rate and payback plan. If you have high-interest private loans and can get a much lower rate or better conditions with the new loan, refinancing makes the most sense.
On the other hand, the Federal Direct Loan Program gives you the option of consolidating your federal student loans into a single new direct loan. You will still be qualified for some of the unique benefits of federal loans, and your new interest rate will be the weighted average of your prior loans.
While private loans cannot be combined with federal loans, if you have both private and federal loans, you can do so by using a private lender for the private loans and a government program for the federal loans.
Less Regular Monthly Payments
By providing you with a reduced interest rate, private loan consolidation can assist in lowering your monthly loan payments. Overall payments will be lower as a result, saving money throughout the course of the loan. Many grads also discover that when their credit scores rise over time, they may obtain better interest rates.
By extending the term of your loan, a private consolidation or refinancing can also reduce your monthly payments. You will see a significant decrease in your monthly payments, for instance, if you refinance a 10-year student loan into a 20-year loan. But as we’ll see later, there is a significant disadvantage to taking out a lengthier loan.
If you are eligible for one of the government’s income-based repayment programs, combining your federal loans may allow you to lower your monthly payments. Your monthly payments are determined by these plans based on your income or your ability to pay.
Less Regular Monthly Payments
On top of all your other expenditures, managing several student loan payments may be a pain. You may simplify your finances by consolidating your student loan debt (or two, if you consolidate your private and federal loans separately, as is advisable).
If you sign up for an automated payment plan, many private lenders may even provide an interest rate reduction. You may avoid ever forgetting a payment by choosing this option, which also saves you a modest sum of money each month.
Flexible Terms for Repayment
When you consolidate your debt with a private lender, you get to pick the loan’s term and interest rate (fixed or variable). Since rates might increase at any point, choosing a variable rate can be riskier, but it can also result in a cheaper interest rate at the beginning of the loan. The interest rate for federal consolidation loans is fixed.
Getting rid of a cosigner
You could be qualified to sign for the loan on your own, which is another advantage of refinancing your private loans. Dropping a cosigner—typically a parent or other close relative—not only releases them from responsibility for your loan, but it may also improve their credit and enable them to apply for new lines of credit if necessary. Cosigners are often not required for federal loans.
Cons You Might Pay More Over Time
While a loan with a longer term may have cheaper monthly payments, the interest that accumulates over the course of the loan might force you to pay thousands more overall.
The Benefits of a Federal Loan May Be Lost by You
You won’t be able to enroll in an income-based repayment plan if you combine a federal student loan with a private lender. Additionally, you won’t be qualified for federal loan cancellation and forgiveness programs anymore. These are the main justifications for just consolidating federal debts under the federal scheme.
Any Current Grace Periods May Be Eliminated
You must begin making payments on a refinanced loan as soon as you obtain one from a private lender. Many student loans allow you to postpone payments if you are enrolled in a graduate program or are still attending school. Wait until the grace period on your existing loan expires before beginning the refinancing procedure.
Consolidating Student Loans: A Guide
Your neighborhood bank or credit union, as well as lenders who focus on these kinds of loans, are just a few financial organizations where you may combine your student loans. Earnest, LendKey, and SoFi are a few of the well-known brands in the industry.
On the Federal Student Aid website of the Department of Education, you may discover additional details regarding the procedures for combining your federal loans.
Is Consolidating Your Student Loans a Smart Move?
Consolidating your student loans might be a wise decision if you have loans from many service providers. It is simpler to handle a single debt with a single monthly payment thanks to consolidation. A cheaper interest payment may also be obtained by consolidation.
Another advantage of consolidation is that it can provide you more time to pay off your debts, which would lower your monthly payment. The overall amount of interest you pay on your loan might rise as a result, though.
Does Consolidating Student Loans Affect Your Credit?
Because there is no credit check involved in federal consolidation, it will not damage your credit. Your credit score may temporarily decline if you combine your debts with a private lender since the lender will do a hard credit check on you; nevertheless, your credit may gain from consolidation if you end up with a reduced interest rate and lower monthly payments.
Which student loans are excluded from consolidation?
Consolidating private student loans is not possible. Also prohibited from consolidation with other student loans in the child’s name are direct PLUS loans, which parents take out to pay for their children’s education.
Loan Forbearance for Students
Borrowers of federal student loans will now have rights, according to the White House. Student loan payments were suspended as a result of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was approved in March 2020.
Additionally, the Biden administration has promised to cancel up to $20,000 of each borrower’s federal student loan debt. The government has prolonged the suspension of payments until 60 days after June 30 or 60 days after the case is settled, whichever comes first, even though courts have blocked the debt reduction scheme owing to continuing litigation.
This implies that during this time, there are no payments due from borrowers, no interest is charged, and there are no late fines. Even though you are exempt from making payments, you should nonetheless do so, especially if your debt is ineligible or exceeds $20,000.
Refinancing My Federal Student Loans: Should I Do It?
Refinancing federal student debt is not always the best option, even if it may result in a cheaper interest rate and monthly payment. Refinancing federal student loans disqualifies you from programs like income-driven repayment and student debt forgiveness. A straight consolidation loan can be preferable to refinancing if you believe you might require these services.