Private student loan consolidation, sometimes referred to as student loan refinancing, allows you to combine multiple student loans into a single loan through a private lender. Consolidating your student loans may reduce your monthly payments or help you get out of debt faster, especially if you qualify for a lower interest rate than what you’re currently paying.
Whereas federal student loan consolidation only lets you combine federally held student loans, consolidating through a private lender is a way to combine all of your student loan debt: federal, private or a mix of both. That being said, moving your federal student loans into a private consolidation loan comes with a big risk — you lose access to federal protections such as income-driven repayment plans and student loan forgiveness programs.
Here’s everything you need to know about private student loan consolidation, so you can decide if this strategy is right for you:
— How Private Student Loan Consolidation Works
— Benefits of Private Student Loan Consolidation
— Risks of Consolidating Into a Private Student Loan
— Is Private Student Loan Consolidation Right for You?
— How to Apply for Private Student Loan Consolidation
Private student loan consolidation is when a private lender pays off your existing student loan debt and issues you a new loan with different repayment terms. During the consolidation process, you may be able to modify your loan terms to meet your financial goals. For example:
— To lower your monthly payments, you can switch to a longer repayment period, but you’ll end up paying more in interest over the life of the loan.
— To get out of debt faster, you can opt for a shorter repayment period. This will also save you money in the long run, although your monthly payments will likely be higher.
— To save money during repayment, you can try to qualify for a lower interest rate. This may also reduce your monthly payments, depending on the loan length you choose.
Private student loan lenders determine your eligibility and interest rate based on creditworthiness. Borrowers with high credit scores and low debt-to-income ratios will see the most competitive student loan interest rates available, while those with poor credit or a low income will see higher rates, if they qualify at all. If you can’t get a low interest rate on a consolidation loan, it may help to enlist the help of a trusted co-signer.
Remember that consolidating federal student loans through a private lender means you lose access to federal income-driven repayment plans, hardship programs and student loan forgiveness measures. If you have federal student loans and you want to keep access to these federal protections, you may want to consolidate them separately through a federal direct consolidation loan.
[READ Best Student Loan Refinance Lenders]
Federal vs. Private Student Loan Consolidation
Benefits of Private Student Loan Consolidation
— You can streamline the repayment process. Consolidating multiple loans into a single monthly payment can help you keep track of your debt repayment progress and avoid accidentally missing payments.
— You could get a lower interest rate. You might qualify for a better rate if your financial situation has improved since you initially borrowed your student loans. For example, if you secured a stable job after graduation, you’d be a more creditworthy applicant than you were as a college student.
— You may be able to reduce your monthly payments. It’s possible to consolidate to a longer repayment term to lower your monthly student loan payments. Getting a lower interest rate is another way to cut down your monthly payments — using both of these strategies can help you save even more.
— You can remove a co-signer from your loans. If you initially borrowed private student loans with a co-signer, you may be able to consolidate without a co-signer if your finances have improved since then. Of course, you may be able to remove a co-signer from your loan without consolidating if your lender offers a co-signer release.
— You can switch to a fixed interest rate. If your existing private student loans have a variable interest rate, consolidation is one way to switch to a fixed interest rate. This can keep your monthly payments from rising over time.
Risks of Consolidating Into a Private Student Loan
— You could end up paying more money over time. Consolidating your student loans to a longer repayment term means you’ll be making more monthly payments, allowing more time for interest to accrue on your debt.
— You might not get a lower interest rate. Private student loan interest rates depend on the borrower’s creditworthiness but are also influenced by wider economic conditions. If rates were lower when you originally borrowed your student loans, consolidating may not be worthwhile. Plus, private student loan rates may be higher than federal student loan rates, which are set by Congress.
— You might not qualify at all. Private lenders determine your eligibility based on your creditworthiness, including credit score and debt-to-income ratio. If you have bad credit, low income or high levels of debt, it may be difficult to qualify for private student loan consolidation.
— You will lose access to federal student loan protections. Refinancing federal student loans into a private consolidation loan means you’ll be ineligible for programs like income-driven repayment, deferment, forbearance and student loan forgiveness.
[How to Lower Your Student Loan Payments]
Is Private Student Loan Consolidation Right for You?
Whether you should consolidate your student loans through a private lender depends on a number of factors that will be unique to your financial situation, so it’s important to take a deep look into your current loan terms and budget before you formally apply. Here are a few instances in which private student loan consolidation might make sense.
You Only Have Private Student Loans
If you only have private student loans, then you don’t risk losing access to federal benefits by consolidating — you weren’t eligible anyway. Just make sure you can qualify for more competitive terms on your new loan, since it may not be worthwhile to consolidate if you can’t qualify for a lower rate.
If you have both federal and private student loans, it’s possible to move them all into a single private loan. However, it may be wise to consolidate your student loans separately by moving your federal loans into a federal consolidation loan and your private loans into a private consolidation loan. You’d still end up with two separate loans, but you’d retain protections on your federal student debt.
You Can Qualify for Better Loan Terms
Before you decide if private student loan consolidation is right for you, you’ll need to run the numbers to see if it will pay off in the long run. Play around with different loan term scenarios using a student loan calculator, paying close attention to the total, long-term interest costs — not just a lower monthly payment. Most private lenders let you prequalify to check your estimated student loan rate with a soft credit inquiry, which won’t hurt your credit score.
If you borrowed private student loans while you were in school, your finances may be in a better place if you secure a stable job after graduation. Having a better credit score and a higher income can help you qualify for more favorable loan terms, like a lower interest rate, than when you initially borrowed your student loans.
As for federal student loans, they typically carry lower rates than private student loans, but there are a few exceptions. You might qualify for more favorable terms through a private lender if you went to school when federal student loan rates were high. Additionally, federal PLUS loans made to parents and graduate students have the highest rates of any federal student loan.
You Don’t Plan on Using Federal Student Loan Programs
Moving federally held student loans into a private loan means you’d lose access to valuable federal programs. Avoid private student loan consolidation if you plan on taking advantage of the following programs:
— Income-driven repayment plans. Enrolling in an IDR plan limits your student loan payments to a set percentage of your discretionary income. After a repayment period of 20 or 25 years, the remaining balance of your federal student loan debt is forgiven.
— Student loan forgiveness. There are several federal student loan forgiveness programs aimed at providing relief for teachers, public servants, nonprofit workers, and those with a total and permanent disability, among other groups of borrowers. For example, if you’re a government employee with federal student loan debt, consolidating into a private student loan means you’ll be ineligible for Public Service Loan Forgiveness.
— Forbearance or deferment. It’s difficult to plan for future financial hardship, but if you think you might ever need federal forbearance or deferment to avoid student loan default then consolidating into a private loan may not be the right move. Although some private lenders offer their own hardship programs, the details vary from one lender to the next.
At the same time, some borrowers may not plan on using federal programs — and others may not qualify. For example, a high-income professional like a doctor or lawyer might not need financial hardship programs, or they may earn too much money to qualify for certain student loan forgiveness measures. Especially if they have high-interest PLUS loans from obtaining an advanced degree, consolidating to a private loan with a lower rate might make sense.
[Read: Best Private Student Loans.]
How to Apply for Private Student Loan Consolidation
1. Check your credit score. Find out if you’re a creditworthy applicant by checking your credit score. There are several free apps that let you see your FICO score. You can also request a free copy of your credit report from all three credit bureaus (Equifax, Experian and TransUnion) on AnnualCreditReport.com.
2. Get prequalified through multiple lenders. When it comes to private student loan consolidation, it pays to shop around. Most lenders let you get prequalified to see your estimated terms, including monthly payment and interest rate, without impacting your credit score.
3. Compare offers. Run the numbers to find the loan offer that best suits your financial situation. Be sure to compare the total cost of borrowing, paying close attention to the interest rate and loan length. For example, a loan with a lower rate but a longer repayment term might end up costing you more money in the long run since you’ll be making additional interest payments.
4. Fill out a formal application. Once you’ve chosen a lender, you’ll need to formally apply to consolidate into a private student loan. During the application process, the lender will take a close look at your finances, including your income, existing debts and on-time payment history. You’ll submit to a hard credit check, which will have a temporary negative impact on your credit score.
5. Keep making payments. If you’re approved, your private consolidation lender will pay off your existing lenders. This may take a few weeks, so you should keep paying your current lender to avoid missing a payment while your loans are being transferred. Once the consolidation is finalized, you’ll begin making payments to your new lender.
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What Is Private Student Loan Consolidation? originally appeared on usnews.com
