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01.10.2019Student Loans

The best way to consolidate student loans

Paying back student loans can be hard, causing financial strain and stress on many people. One way to relieve the burden of large monthly repayments and dealing with multiple lenders is through consolidating your student loan. If you have multiple loans, loan consolidation is where you turn those multiple loans into a single loan. The benefits of this include only having to deal with one lender, having one interest rate, one monthly repayment and also the potential to reduce your payments.

When considering consolidating your student loan there are two options for you to consider; federal and private:

Federal student loan consolidation is the process of consolidating all of your existing federal loans into a single loan. Federal loan consolidation is done through the Department of Education. While it won’t reduce your interest rates, it may result in lower monthly repayments if you extend your loan term.

Private consolidation, also known as student loan refinancing, is done entirely through a private lender and can result in a lower interest rate.

So which option is best for you? Below are the things you need to consider when shopping around.

Private student loans – what you need to know

One of the main advantages of private student loans is the potential to reduce your interest rate. When applying, your financial history will be what determines your new interest rate. This will include things such as your credit score, education and income. The required credit score will vary by vendor, however to get the best rate you should aim to be in the high 600s and expect an interest rate anywhere between 2-9%.

It is worth noting that when you refinance federal loans into a private loan you will potentially lose any consumer protections tied directly to that federal loan. This can include giving up the option to link payments to your income stream and any loan forgiveness opportunities.

One of the main advantages of a private student loan is that since the lender is a private company, they will consolidate both federal and private loans. Regardless of what your existing loan is, by consolidating you’ll only have one monthly payment and an improved interest rate.

Private loan consolidation is worth considering if you have:

·       Consistently made you monthly repayments.

·       Solid credit rating in the high 600s.

·       Good job history.

Federal student loans consolidation – what you need to know

Federal loan consolidation differs from private loans in that there is no credit rating requirement and you can only consolidate existing federal loans. You won’t be able to lower your interest rates with a federal loan, however you can reduce your monthly payments by extending the term of your loan.

When you uptake a federal loan consolidation, the government pays off your existing loan and replaces it with your new consolidation loan. It is free to consolidate loans via the Department of Education and you should be eligible once you’ve graduated.

Your new fixed interest rate will be the average of all your previous interest rates. You will also get a new loan term which will provide the opportunity to reduce your monthly payments. By extending your loan terms you’ll likely see your payments reduce, even though your interest rate has not gone down.

Once your federal consolidation loan is approved, your repayments will start within 60 days and will be determined by your total loan balance.

Federal student loan consolidation is worth considering if you:

·       Have multiple federal loans and want to consolidate them so that you only have one monthly repayment.

·       Have fallen into student loan default and need to get payments back on schedule.

·       Are looking to be eligible for an income-driven repayment plan or a public service loan forgiveness.

Final Thoughts

There are advantages and disadvantages to both federal and private loan consolidation. Be sure to digest and re-read the above breakdown of each option and determine which option is a best fit for you. Everyone’s personal and financial situation is different so there is no right and wrong loan option for you to select. Shop around, do your research and find the option that will save you the most money in the long term.

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01.10.2019Student Loans