Student Loan Consolidation Guide

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Student loan debt is a grave concern in modern America. In fact, the amount of outstanding debt from student loans is now over $1.5 trillion. And while student debt may seem like a fact of life for new college graduates, it actually follows a lot of borrowers for decades after school. It’s estimated that 1.8 million borrowers over the age of 62 are still paying off student loans.

The picture painted by these statistics is clear: Many borrowers are in over their heads with student loan debt and are looking for relief. Student loan consolidation or refinancing can be a great tool to save on, or simplify, your monthly payments. But going that route can also have serious consequences if not approached carefully – there are even student loan consolidations scams to be aware of.

That’s why we created this guide – to give borrowers a useful resource that empowers them to choose whether student loan consolidation is right for them, and which type may best suit their needs. So let’s get to it.

Best Places to Refinance and Consolidate Student Loans in 2019

Some of you would probably just like to cut to the chase and learn about the best places to refinance and consolidate student loans. So we’ll start with our top choices for consolidating student loan debt, and then, if you want to learn more about the nuts and bolts of the process, we’ll get into that next.

Here are our top three picks for student loan consolidation:

SoFi

SoFi is an online personal finance company that specializes in mortgages, personal loans, and student loan refinancing. It’s a leader in the field; in 2012, it was the first company to start refinancing federal and private student loans together.

Why it’s worth a look: They’re currently offering fixed interest rates of 3.69% to 8.074%, and a variable interest rate of 2.43% to 6.65% (that includes an auto-pay discount of 0.25%). You have a lot of flexibility in your loan terms, too, with repayment options of five, seven, 10, 15, or even 20 years. And you can refinance anything from $5,000 to whatever crazy high number your student loans are.

Disclaimer: Fixed rates from 3.69% APR to 8.074% APR (with AutoPay). Variable rates from 2.43% APR to 6.65% APR (with AutoPay). Interest rates on variable rate loans are capped at either 8.95% or 9.95% depending on term of loan. See APR examples and terms. Lowest variable rate of 2.43% APR assumes current 1 month LIBOR rate of 2.43% plus 0.04% margin minus 0.25% ACH discount. Not all borrowers receive the lowest rate. If approved for a loan, the fixed or variable interest rate offered will depend on your creditworthiness, and the term of the loan and other factors, and will be within the ranges of rates listed above. For the SoFi variable rate loan, the 1-month LIBOR index will adjust monthly and the loan payment will be re-amortized and may change monthly. APRs for variable rate loans may increase after origination if the LIBOR index increases. The SoFi 0.25% AutoPay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. *To check the rates and terms you qualify for, SoFi conducts a soft credit inquiry. Unlike hard credit inquiries, soft credit inquiries (or soft credit pulls) do not impact your credit score. Soft credit inquiries allow SoFi to show you what rates and terms SoFi can offer you up front. After seeing your rates, if you choose a product and continue your application, we will request your full credit report from one or more consumer reporting agencies, which is considered a hard credit inquiry. Hard credit inquiries (or hard credit pulls) are required for SoFi to be able to issue you a loan. In addition to requiring your explicit permission, these credit pulls may impact your credit score. Terms and Conditions Apply. SOFI RESERVES THE RIGHT TO MODIFY OR DISCONTINUE PRODUCTS AND BENEFITS AT ANY TIME WITHOUT NOTICE.

Discover Student Loans

Yes, they are part of the same company that offers the credit card. Discover Bank has offered Discover Student Loans for about a dozen years now.

Why it’s worth a look: The fixed rates between 5.74% and 8.49%1 APR, and variable rates between 4.62% and 7.62%1 APR (includes an auto-pay discount of 0.25%). The loan terms are only 10 to 20 years, offering loans from $5,000 to $150,000, and on the plus side, there are no late fees.


Discover Student Loans Disclosures
1. Get a variable interest rate from 4.62% APR to 7.62% APR (3-Month LIBOR + 2.12% to 3-Month LIBOR + 5.12%) for either a 10-year or 20-year repayment term. Or lock in a fixed interest rate from 5.74% APR to 8.49% APR for a 10-year repayment term or from 5.99% APR to 8.49% APR for a 20-year repayment term. The fixed interest rate is set at the time of application and does not change during the life of the loan. The variable interest rate is calculated based on the 3-Month LIBOR index plus the applicable margin percentage. The margin is based on your credit evaluation at the time of application and does not change. For variable interest rate loans, the 3-Month LIBOR is 2.50% as of July 1, 2019. Discover Student Loans may adjust the rate quarterly on each January 1, April 1, July 1 and October 1 (the “interest rate change date”), based on the 3-Month LIBOR Index, published in the Money Rates section of the Wall Street Journal 15 days prior to the interest rate change date, rounded up to the nearest one-eighth of one percent (0.125% or 0.00125). This may cause the monthly payments to increase, the number of payments to increase or both. The lowest listed APRs include a 0.25% rate reduction for automatic payments. Visit discover.com/student-loans/consolidation for more information, including up-to-date interest rates and APRs.

Credible

Credible is a website where you find lenders who are willing to refinance your student loans.

Why it’s worth a look: Credible won’t charge you an origination fee or service fee, and if you refinance through one of their lenders, you won’t have a prepayment penalty if you pay off your loan early. It’s also a good way to find a lot of lenders at once. The interest rates, repayment terms, and how much you can refinance will depend on the lender, but Credible allows you to compare those details side by side. It’s also easy to use; you just fill out one form.

What is student loan consolidation?

For those who aren’t quite sure, let’s make it clear: If you have two or more student loans that you owe money on (which is often the case, if you took out a loan each year of college), student loan consolidation will turn those multiple loans into a single loan. People generally do this to make their student loans easier to manage – and it can sometimes lower your monthly payment, too.

What is student loan refinancing?

Refinancing your student debt is a lot like student loan consolidation, but you can do it whether you have one student loan or several, and the main goal is to get a lower interest rate on the debt. When you refinance your student debt, you’ll find a new lender to pay off your existing loan or loans, and enter a new repayment agreement with that lender, ideally at a lower interest rate. (Is it possible to refinance and get a higher interest rate? Sure, but don’t do that!)

The Basics of Student Loan Consolidation and Refinancing

There are two types of consolidation loans: federal and private, and they each come with distinct advantages and drawbacks. Federal consolidation loans can only be used for federal student loans, but private consolidation loans can be used for both federal and private student loans. Consolidation loans repay old loans with a brand new loan that has its own unique terms and conditions. The basics of federal and private consolidation loans are outlined below.

Federal Consolidation Loans

How Federal Consolidation Loans Work

Borrowers can combine multiple (at least two or more) federal loans into a single Direct Consolidation Loan (this is the only federal consolidation loan available). All types of federal student loans can be consolidated together except a Direct PLUS Loan that was taken out by a parent to help pay for a child’s education (student PLUS loans can still be consolidated). However, private loans can’t be included in a federal consolidation loan.

The new Direct Consolidation Loan provides a single fixed interest rate that is equal to the weighted average of all the loans being consolidated, and the interest rate is rounded up to the nearest eighth of a percent (0.123%). A weighted average means that the loans with a higher balance influence the interest rate more than loans with a smaller balance – the overall impact of each old loan on the new interest rate is proportional to the comparative balance of that loan.

Because the interest rate is a weighted average and rounded up, borrowers won’t ever save money on interest by opting for a federal consolidation loan unless the loans are pre-2006 and have a variable interest rate. The new interest rate would still be equal to the current interest rates in that situation, but it might save money in the future if the variable rates rise (the new fixed rate would stay the same).

The following table illustrates how a weighted average works. In this example, there are three students that each have three loans. A federal student loan consolidation calculator provided by US Bank was used to calculate the weighted average.

table-showing-examples-of-weighted-averages

Eligibility Requirements

Borrowers who are out of college or are attending classes less than half-time can consolidate their federal student loans. Only loans that are in repayment or in the grace period are eligible for consolidation, and a Direct Consolidation Loan must include at least one Direct or FFEL Program Loan. Loans that have been in default can be consolidated after three consecutive monthly payments have been made or if the borrower agrees to repay the consolidation loans under an income-driven repayment plan (where the payments are based on the income of the borrower).

Student Loan Consolidation vs. Student Loan Refinancing

In short, the term “consolidation” is used to describe the process of combining multiple loans into a single loan, while the term “refinancing” is used to describe the process of using a more advantageous loan to repay an older loan. While refinancing is often used in other realms of finance (like mortgages) to describe replacing a single older loan with a new one, consolidating with a private loan technically includes refinancing as well, since the term and interest rate of the new loan are different from the old loans. Getting a federal consolidation loan isn’t usually considered “refinancing,” since the interest rate of the new loan is equal to the weighted average of the loans being consolidated.

Student Loan Consolidation Refinancing
You’ll combine multiple student loans to turn it into one payment. You’ll get a new loan that replaces the old one.
Generally, you consolidate loans to simplify the process of paying them. Generally, you refinance to get a lower interest rate or monthly payment and to save money.
Usually, after consolidation, the schedule will have your debts paid off in 10 years. When refinancing, you can sometimes structure it so that you have up to 20 years to pay off the debt.

How Private Consolidation Loans Work

With a private consolidation loan, a private lender writes a new loan that pays off the old loans. The interest rate is primarily determined by the lender’s evaluation of the borrower’s credit history. However, some lenders also factor in the borrower’s current financial and professional circumstances. The new interest rate can be lower or higher than the weighted average of the old loans and can be fixed (the interest rate won’t ever change) or variable (the rate changes based on the market conditions).

Eligibility Requirements

Private and federal loans can both be refinanced with a private consolidation loan. To be eligible, borrowers must have a clean credit history and a “good” credit score (a score of 670 or above is considered good, according to FICO). Borrowers with a poor credit history may still be able to qualify if they can secure a cosigner with good credit.

Some lenders require that the borrower’s debt-to-income ratio be below a certain threshold. Many lenders also factor in a borrower’s employment stability and prospects – they may even have minimum annual income requirements. Additionally, certain lenders only offer loans to those who have graduated or have completed a specific type of degree.

Federal vs. Private Student Loan Consolidation

Federal and private consolidation loans both have unique advantages and disadvantages. So let’s go through them.

Federal Consolidation Loans: Advantages and Drawbacks

Overall, borrowers should consider a federal consolidation loan if:

  • They have federal loans with variable interest rates (pre-2006).
  • They want to combine a large number of federal loans to get one simple payment.
  • They need to lower their monthly payments, and are okay with paying more over the lifetime of the loan.
  • They have federal loans that aren’t eligible for income-driven repayment plans.

Here are some of the advantages of federal consolidation loans:

  • Free: There are no origination fees or other costs to consider.
  • No credit check or cosigner: Borrowers with less-than-optimal credit don’t have to worry about a credit check or finding a cosigner.
  • Smaller monthly payments: Federal Direct Consolidation Loans can be repaid on an income-driven repayment plan (the monthly payment is based on the borrower’s income), which may result in a lower overall payment. Also, consolidation loans typically lead to a longer repayment term, which allows for smaller monthly payments.
  • Deferment and forbearance: If you encounter a financial hardship (like a serious illness or a loss of work), you have deferment and forbearance options that allow you to stop making payments for a period of time without entering default.
  • Federal Student Loan Forgiveness: Direct consolidation loans have access to loan forgiveness or cancellation if the borrower qualifies.

There are also drawbacks to federal student loan consolidation to consider:

  • It won’t lower your interest rate: Since the new interest rate of a Direct Consolidation Loan is the weighted average of the old loans, no money will be saved over the life of the loan. In fact, the interest rate is rounded up to the nearest eighth of a percent, so the new loan might actually have a slightly higher cost overall.
  • It could even cost more: If the new repayment term is longer than the length of the loans being consolidated, more interest will be charged over the life of the loan unless, it’s paid off before the end of the term (this strategy requires additional payments or paying more than the minimum payment due each month).
  • Loan forgiveness progress is lost: Loan forgiveness requires borrowers to make a certain number of qualifying payments on the loan while meeting certain conditions (like working as a teacher or paying under an income-driven repayment plan). Since consolidation involves a brand new loan, progress towards student loan forgiveness is reset.
  • Can’t prioritize high-interest loans: If borrowers have lower interest loans (typically undergraduate) and higher interest loans (typically graduate), consolidating them all together will make it impossible to prioritize paying off the higher interest loan first (by paying extra on that specific loan).
  • The consequences of defaulting are severe: Unlike private lenders, the federal government can garnish your wages or use tax refunds to repay student loans that have entered default.

Private Consolidation Loans: Advantages and Drawbacks

There are three main advantages to private consolidation loans:

  • Lower interest rates: Private consolidation is the only way to refinance both federal and private loans with the potential of a lower interest rate which can result in lower monthly payments and more savings over time.
  • Can release a cosigner: Some lenders might be willing to consolidate old loans that were cosigned into a new loan without the cosigner.
  • Longer repayment terms: Private lenders may allow for the repayment term on a consolidation loan to be extended past that of the old loans – this will save money on the monthly payment, but will increase the overall cost of the loan.

While private consolidation loans can be beneficial, there are significant disadvantages to mull over – especially when consolidating federal loans with a private loan.

  • Strict requirements: Borrowers will need to undergo a credit check as only those with an above average FICO credit score will typically be eligible. If a person’s credit isn’t great, a cosigner may be required. Additional requirements like degree completion or annual income thresholds may also apply.
  • Inconsistent rates: While the rates for federal consolidation loans can be determined ahead of time, borrowers must shop around for rates from private lenders who all evaluate borrowers somewhat differently. However, the evaluation is based primarily on the borrower’s creditworthiness and economic factors.
  • Fees: Some lenders charge origination fees (usually in the range of 1% or 2%). While these don’t usually have to be paid up front, they can be tacked onto the loan balance and result in additional interest being charged.
  • Limited loan terms: Loan terms for private loans tend to be shorter than those of federal consolidation loans. Federal consolidation loans range from 10 to 30 years while private consolidation loans typically range from 5 to 20 years.
  • Few fringe benefits: Compared to the benefits that federal consolidation loans offer, private consolidation loans don’t offer much help for borrowers with hardship or those who are seeking loan forgiveness. For example, forbearance isn’t always granted if a person were to lose his or her job. What’s more, any existing benefits (such as interest reduction after a certain period of on-time payments) from current private loans may be lost.

How to Use Consolidation Loans Effectively

If you have a mix of federal and private student loans, here are two strategies to make student loan consolidation work for you:

Strategy #1: Consolidate federal and private student loans separately: Given the benefits that federal student loans come with, many experts recommend consolidating federal and private student loans separately.

Strategy #2: Consolidate less favorable federal loans and private loans together: Graduate loans tend to have higher interest rates than undergraduate loans. For example, a current Direct PLUS loan for a graduate student comes with an interest rate of 6.6%, which is higher than the interest rate on a Direct Loan for undergraduates (5.05%). Consolidating your undergraduate loans with a federal loan, and then consolidating graduate loans with any private loans using a private lender has the potential to save money, provided you can obtain a low-interest private loan.

How to Consolidate Your Federal Student Loans

Ready to get started? We’ll walk you through the process, starting with how to consolidate your federal student loans. Borrowers should be aware of several things:

  • The process is free: Borrowers shouldn’t pay for help with their student loans. There are federal loan consolidation services that offer to help consolidate federal student loans for a fee. Whether or not this is an outright scam (many times the money is kept and no service is actually provided), the same services that the company charges for can be obtained for free from your loan servicer.
  • Consolidation is final: A Direct Consolidation Loan actually pays off the loans being consolidated and the old loans disappear. Potential consolidators should be aware that the process is irreversible.
  • There’s help if you need it: If you have problems or questions during this process, you can call the Federal Student Aid’s Loan Consolidation Information Call Center at 1-800-557-7392. Additionally, your loan servicer may be able to provide help with this process.

Once you’ve completed your research and you’ve decided to consolidate your federal student loans with a Direct Consolidation Loan, the actual process of consolidating is relatively simple. The following is a step-by-step guide to obtaining a Direct Consolidation Loan.

Step 1: Log in at studentloans.govThis process requires you to enter your FSA ID. If you have an FSA PIN and haven’t yet created an FSA ID, you’ll need to do that now. There’s an option to create an FSA ID on the login page.

Step 2: Start the application. The form that needs to be filed can be found by clicking the “Apply for Loan Consolidation” button on the home page. Those who want to apply online can simply click “Start,” while those who want to fill it out another way can find instructions for doing so on the same page.

Step 3: Choose which federal student loans to consolidate. As was previously mentioned, those that have made progress towards loan forgiveness or cancellation may want to leave those loans out of the consolidation.

Step 4: Decide whether to delay processing. If any of their loans are currently in the grace period, borrowers may elect to have their servicer delay the processing of the loan consolidation for one to nine months to take full advantage of the grace period for the loan(s).

Step 5: Select a loan servicer. The Federal Government contracts private companies to service federal student loans. These companies are called “loan servicers.” Direct Consolidation Loans are managed by one of four servicers chosen by the borrower. Your choices are: FedLoan Servicing, Great Lakes Educational Loan Servicing, Navient, and Nelnet. If one of those servicers currently manages your loans, you can retain the same servicer or choose a different one.

Step 6: Choose a repayment plan. Regardless of which repayment plans the previous loans were enrolled in, you’ll need to select a new repayment plan for the consolidation loan. There are seven repayment plans to choose from, which fall into two categories: term-based or income-based.

Under term-based plans, the monthly payment is determined by the term length (say, 10 years). There are options for making equal monthly payments throughout the loan term, or payments that start lower and increase as time goes by.

Monthly payments on income-based plans are based on a percentage of your income, and qualify for loan forgiveness after a number of qualifying payments have been made (usually 20 years). If you choose an income-based plan, you’ll need to provide financial information. This can be submitted with the application by granting access to personal IRS tax information, otherwise you’ll have to submit a copy of your most recent federal tax return to your loan servicer before the loan consolidation can be finalized.

Step 7: Provide personal information and references, and submit the application. At this point, you just need to fill out some basic personal information. In addition, you’ll need to provide the names of two references who have known you for at least three years. After you’ve completed the form and double-checked it for accuracy, it’s time to submit it.

What’s next: It’s important to note that while your application is being processed, you’ll still need to make payments on your old loans as usual. Once your application has been processed, your new loan servicer will contact you with instructions for how and when to start making payments on the consolidation loan.

How to Choose a Private Consolidation Loan

If you’re turning to private loans to consolidate your student debt, the lender you choose is critical, and there are more aspects to consider than just the interest rate. Factors like fringe benefits and eligibility requirements are also important. Consider these five features when shopping for a private consolidation loan:

Eligibility

The primary way to filter out lenders in your search is to determine whether they’ll even offer you a consolidation loan. For example, most lenders require a minimum credit score, and others only offer loans to those whose annual income meets a certain threshold. The following are the most common eligibility requirements:

  • Credit requirements: Most lenders require a 650 credit score or better to consolidate or refinance their student loans; does your credit score meet the lender’s requirements? Is your debt-to-income low enough to be eligible? Does the lender allow borrowers with shaky credit to use a co-signer?
  • Employment stipulations: Lenders may have minimum income requirements, or even require that you be employed in a certain industry to qualify.
  • Degree requirements: Some lenders only accept graduates or those with a specific type of degree.
  • Other requirements: Is there a specific credit union that the shopper must be a member of? Are there location or state limitations?

Interest Rates

Just because you meet a lender’s minimum credit requirements doesn’t mean they’ll give you their best interest rate; for that, you’ll generally need excellent credit. However, the interest rate the most important factor to consider when shopping for a refinance or consolidation loan, since it has the power to save – or cost – you significant money over time. Look for lenders that offer a rate discount if you set up auto-pay from your bank account.

Note: Many lenders perform soft credit checks, so their initial rate quotes won’t impact your credit score – but others don’t, so be careful during this process. In general, if you have to provide your Social Security number, you can expect a hard credit check that may temporarily dent your credit score. (This is a good time to note, too, that if you’re requesting loan information on Credible.com, which aggregates student loan refinance and consolidation offers, your credit score won’t be impacted one way or the other.)

Loan and Refinancing Terms

Most lenders have a minimum and maximum consolidation loan amount. For instance, a common minimum amount is $5,000, and a common maximum is $200,000. Another important factor to consider is the minimum and maximum loan terms the lender offers. If you’re looking to stretch your payments out over a longer time period, check whether the lender charges a higher interest rate for longer term lengths.

Repayment and Hardship Options

Some lenders offer benefits similar to those available with federal student loans, like repayment plans, deferment, or forbearance. These fringe benefits can be very valuable and should be taken into consideration when choosing a lender.

Fees and Discounts

Unlike with federal consolidation loans, origination fees are a big expense you need to take into account when looking for private loans. Not all lenders charge them, but a 1% to 2% fee can take a great loan and make it unattractive. There are other fees (such as late fees) to research, too.

On the positive side, some private loans have discounts available. For instance, many lenders will offer you a 0.25% rate discount if you set up auto-pay, meaning your loan payment is set up to be automatically withdrawn each month from a checking account.

As for the process of actually consolidating your private student loans, it’s not difficult. You find a good private lender, such as SoFi - Student or Discover Student Loans - Debt Consolidation, or search a good loan marketplace such as Credible - Student, and they’ll walk you through the steps.

How to Refinance Your Student Loans

When it comes to private student loans, the process for refinancing and consolidating is very much the same: Find a good private lender or lending comparison website, such as SoFi, Discover Student Loan, or Credible, and they’ll walk you through the steps, which are pretty close to what was outlined a moment ago for consolidating loans.

Take Action

While there’s definitely a lot to think about when it comes to consolidating or refinance student loans, borrowers who know their options can utilize consolidation or refinancing when appropriate to simplify their bill payment procedures, and maybe even save a considerable sum of money.