Student loan debt is incredibly common as the costs of attending college have increased dramatically over the past 30 years. If you are struggling to make payments on your student loans after graduating or choosing not to finish school, student loan consolidation can help to ease some of the pressure and make it easier to avoid defaulting on your loans. Here’s what you need to know to decide if student loan consolidation is right for you.
Student Loan Basics
Both students and their parents can take out loans to fund higher education when they are unable or unwilling to pay the costs upfront. With federal student loans, you won’t have to start making payments until you leave school. Private student loans, meaning those that don’t come directly from the government, sometimes offer this grace period, but not always, so you’ll need to check with your loan provider for the specific details.
How Student Loan Consolidation Works
Depending on the amount you needed to borrow to fund your education, you may have trouble making the loan repayments with your starting salary. If this is the case for you, student loan consolidation may be a viable option to help you lower your monthly payments. In consolidating your student loans, you’ll combine multiple loans into a single, larger loan. Essentially, the federal government will pay off all of your student loans and issue you a new loan. This way, you’ll only have to make a single payment each month instead of several.
It is important to note, though, that student loan consolidation is only available for federal student loans. For private student loans, you’ll need to refinance your loans through an outside lender. We’ll discuss this process in a later section.
In addition to the potential to reduce your monthly payments, consolidating your student loans can also help you qualify for greater flexibility in your repayment plan, as well as some student loan forgiveness programs, like those for public service workers and teachers.
If you consolidate your loans through the federal government, there is no application fee, so you won’t have to worry about adding the cost of loan fees to your financial troubles. There are many private companies out there that claim they can help you with student loan consolidation for a fee, but there is no need to go this route as you can easily complete the process on your own at no charge. You can consolidate your loans at any time after you leave school or drop below half-time enrollment.
Student Loan Consolidation Interest Rates
When you consolidate your student loans, your new loan will have a fixed interest rate. This rate is calculated by producing a weighted average of your original loans. This means that loans with higher balances will have more influence on your new interest rate than those with lower balances. Once the average is calculated, it will then be rounded up to the nearest 1/8, or .125, of a percent.
Make note of the individual interest rates on your loans. If they all fall within a narrow range, consolidation likely won’t have much impact on the overall amount of interest you’ll pay over the life of the loan. If the range is wide, on the other hand, you may be better off paying down the balance with the highest interest rate before refinancing or leaving it out of your consolidation loan to avoid driving up the interest rate on your other loans, as this can result in higher interest overall.
Consolidation Loan Terms
While most student loans have an initial repayment term of 10 years after you leave school, your new consolidated loan can have a term of up to 30 years. By spreading out your payments over a longer term, you’ll be able to drastically reduce the amount you’ll need to pay each month. Of course, the drawback to a longer loan term is that you’ll pay more in interest over the life of the loan as you won’t be reducing your principal balance by as much with each payment.
In most cases, you’ll start making payments on your new loan within 60 days of consolidation. The amount you’ll have to pay each month will depend on the total amount of your loan, the interest rate, and the loan term. In some cases, you may be eligible for an income-based repayment plan to prevent your payments from being higher than you can afford on your current salary. In this type of arrangement, your payment amount may increase as your wages increase, so keep that in mind.
If the loans you are consolidating are still in the grace period, you may wish to delay consolidating them until you near the end of the grace period. This way, you won’t have to start making payments sooner than necessary. It doesn’t make sense to consolidate loans that you don’t yet have to repay, so take full advantage of that grace period while you have it.
Consolidating Student Loans in Default
In general, your loans need to be in good standing in order to consolidate them. This means that you must be up-to-date on your payments or still be in the grace period. It is still possible to consolidate loans that have gone into default, but there are additional requirements to achieve this. First, you’ll need to get your defaulted loans back into good standing by making at least three consecutive monthly payments.
In some cases, the government may garnish your wages or file a court order to compel you to pay your loans. If this is the case for you, you’ll need to have the garnishment or court order lifted before you will be eligible to consolidate those loans. You’ll still be able to consolidate loans in good standing while others are in default, but it is a smarter idea to address the defaulted loans first so you can consolidate everything all at once.
Refinancing Private Student Loans
If not all of your student loans are of the federal variety, you won’t be able to consolidate all of them together. You can’t consolidate private loans into a consolidated federal loan. Instead, you’ll need to seek out a private lender to refinance your school debts. The general idea behind this is the same as with debt consolidation; you’ll take out a large loan and use it to pay off all of your smaller loans. However, the process and terms are not the same.
For starters, you’ll need to pass a credit check in order to qualify for the new loan. This will evaluate the entirety of your financial history, not just your existing student loans. This includes any other debts you have, like credit cards, car loans and mortgages, as well as your repayment history on those debts. Many lenders will also look at your income, job history and level of education to determine your ability to repay a large loan.
In general, you’ll need to have a credit score of at least 690 to qualify for private loans. However, each lender sets its own criteria, so don’t be afraid to shop around with different lenders if you don’t qualify on your first application. Keep in mind that your credit score will take a small hit when a lender checks it, though these inquiries get lumped together if they are for the same type of loan and occur within a two-week period. It is better to file applications with several lenders at once rather than wait for a response from one before applying at the next.
The better your credit, the better your new interest rate will be. The interest rates on your existing loans do not come into play. If you have found yourself in serious financial trouble, your credit score probably isn’t as high as you would like it to be, which can result in a significantly higher interest rate. If you are taking preemptive action while your credit is still solid, though, you may be able to qualify for a rate that is lower than what you are currently paying. In general, interest rates on private refinancing loans range from 2 to 9 percent, though they can definitely go higher for borrowers with poor credit.
While you’ll still get the benefit of reducing your payments to a single monthly payment, you’ll lose your eligibility for student loan forgiveness programs, income-based repayment plans and other benefits of federal student loans, as the federal government will no longer be servicing your new loan. You’ll need to weigh these pros and cons carefully to decide whether you should refinance your student loans privately or stick with just consolidating your federal loans.
The Federal Student Loan Consolidation Process
Refinancing privately can be risky, so for the rest of this discussion, we’ll stick with simply consolidating federal student loans. The process is fairly easy and should only take you about half an hour to complete. You’ll need to finish the application in one sitting so be sure you have enough time to get the job done.
On the studentloans.gov website, you can find the application under the Repayment & Consolidation tab on the homepage. Within this menu, you’ll find a link to Complete Consolidation Loan Application and Promissory Note. Once you have filled out the application form, you’ll be able to select which loans you wish to include in your consolidation loan.
After that, the next step is to choose your repayment plan. This includes the length of your new loan term, as well as any income-based repayment plans. If you choose the income-based option, you’ll also need to fill out the Income-driven Repayment Plan Request form. Before you submit your application, be sure to take the time to read the fine print, so to speak. You want to ensure you fully understand how your new loan will work.
If you prefer to go the analog route rather than submitting your application online, you can download and print paper application forms and mail them in. Of course, this method will take a bit longer as you’ll need to allow for shipping and processing time.
While you are waiting for a response regarding your application, it is crucial that you continue to make payments on your current student loans as agreed. If you stop making payments and your loans go into default, it could invalidate your application. Then, you’ll have to get your loans back out of default and start the process all over again. Once your loan servicer has confirmed that your old student loans have been paid off, you’ll no longer need to worry about them.
What if Student Loan Consolidation Isn’t Enough?
In some cases, even consolidating your student loans may not make as much of a difference in your financial situation as you would like. If you are facing more than $30,000 in student loans, Iron Fist Legal may be able to help you reduce your payments even further. We work with legal experts to find discrepancies in student loan contracts. These discrepancies could result in you overpaying without your knowledge.
We’ll go through your loan details with a fine-toothed comb to find any areas in which we might be able to negotiate. We’ll then advocate on your behalf to get your loan balances reduced by as much as 70 percent. While we can’t guarantee a specific reduction amount, we can promise you that we’ll do everything in our power to get your payments down as much as possible.
We invite you to get in touch with us to learn more about our services and how we can help you reduce your student loan payments. We recognize that financial topics can be incredibly confusing for those who aren’t in the financial industry. We do our best to simplify everything as much as possible so it is easy for you to understand but without glossing over any of the important details.
It all starts with a free consultation with a member of our team, so don’t be shy about reaching out. We’ll be happy to schedule an appointment so we can go over all of your options together.