If you have student loans, you may have heard of loan consolidation before. It means combining multiple loans into one.
People do this because they might be able to get a better interest rate on a single loan, and also because it’s easier to keep track of one monthly payment rather than several. Consolidation can seem like an attractive option when you think about these potential perks.
What you might not realize, though, is that there’s a difference between consolidating private student loans and federal ones. We’ll talk about that in this article.
Private vs. Federal Student Loans
Before we get into the details of student loan debt consolidation, let’s make sure you understand the difference between a federal and a private student loan. Private student loans are issued by private lending companies. Federal student loans are issued by The US Department of Education.
A private student loan is not necessarily easier to secure than a federal one. Federal student loans are often enticing because of postponement options, low fixed-interest rates, and income-based repayment.
Federal Student Loan Consolidation
Let’s start by talking about consolidating federal student loans. If you’ve taken out more than one, consolidating them through a Direct Consolidation Loan is sometimes possible. The federal government offers this type of loan. If you have private loans, this is not an option.
You can apply for one of these consolidated loans for free. You can do so easily online with no credit check. When you do, you can choose new repayment terms. For instance, you might choose a longer-term loan. That will lower your monthly payments, however, you’ll end up paying more interest because of the loan’s longer length.
A federal student loan consolidation loan will cause your interest rate to rise slightly. However, you still might go this route because you’ll now have lower monthly payments and a single bill to pay each cycle.
Private Student Loan Consolidation
Now, let’s move on to private student loan consolidation. If you have private student loans that you want to consolidate, you can deal with a private company instead of the federal government. Like federal student loan consolidation, this option might mean lower monthly payments.
There are some differences, though. For example, a private company will look at how worthy a candidate you are based on your credit report. If you’re looking into federal student loan consolidation, you won’t have to go through that credit check.
The other crucial difference is that some entities through which you can secure private student loan consolidation will charge you something they call an origination fee. That’s a percentage of the loan for processing the existing loan into its new, consolidated version.
You might feel like it’s a reason not to consolidate your private student loans if that origination fee is too steep. However, you can always research lending companies to see if they don’t charge that fee or whether you can find a lower one.
Consolidation Often Makes Sense
Consolidation might be a logical move if you have multiple federal or private student loans. With either option, you can extend the loan’s length, giving yourself more time to pay it back. You can also go from having multiple bills to pay each month to a single one.
Remember that if you’re going for a Federal Direct Consolidation Loan, you can apply for free, and there will be no credit check. If you’re trying to consolidate private loans with a non-federal lending entity, they will check your credit. You’ll also have to watch out for possible origination fees.
Each person with student loans must weigh the pros and cons of private or federal consolidation. A close examination of your finances will often reveal whether this is a prudent option.