The Ultimate Guide: Federal and Private Student Loan Consolidation and Refinancing (2016)

Federal and Private Student Loan Consolidation and Refinancing

Many students have been eager to get student loans to assist them with their countless educational expenses. Many have aimlessly taken on student debt, without realizing that the consequences are practically entering into a lifelong financial commitment. This reality is often not realized until it’s time to repay the loan. That’s when panic sets in and students become overwhelmed with not only the high cost of the student loans, but with the high-interest rates as well. This is exactly what happened to me! My story is the same as yours and I made a decision to fight back and you can too. The first thing you need to do is understand your current student loan situation to uncover what options you currently have and what will be best for you.

Obtaining student loans are easy enough – you basically answer a few questions and you’re done. But repaying the loans, well that’s when the nightmare begins. Some students are required to begin repaying their loans long before they’ve found gainful employment, which makes the situation even more frustrating for them. But thankfully there are programs available to assist, such as deferments, forbearances, and hardship programs. However, for those with outstanding student debt that is currently due now, refinancing and consolidation loan options are available by both private and federal lending programs.

But before you began, you may want to learn more about the different student consolidation and refinancing loan options that are available. The information below can assist you with making a more intelligent decision about your options. 

Refinancing Your Student Loan

Unlike the typical manner in which you can consolidate your student loans, refinancing it is actually the lesser of two evils. Refinancing consists of borrowing additional funds to pay off your existing loans. The purpose of this is usually to take advantage of new loans with lower interest rates, which could ultimately lower your overall repayment amount. This is possible because more of your payment will be applied towards the principal of your loan as opposed to the interest. So you actually end up paying off your student loan a lot faster than you would without refinancing it.

The thing about refinancing your student loans is that you actually have the opportunity to consolidate the loans in a sense as well by including loans with higher interest rates. For example, if you have five outstanding student loans where one is at 2% and the others are between 5% and 6%, it would only be practical to consolidate the loans with interest rates between 5% and 6% if the interest rate on your new reconsolidate loan is offered at 3%. The one loan 2% would not benefit in this case.

Consolidating Your Student Loan

Consolidating student loans basically stretches the repayment terms of the loan out over a longer period of time while lowering the monthly payments. Although this is a common approach to repaying student debt, it’s not necessarily the best approach for everyone. That’s because federal student loans cannot be consolidated along with private loans. Also, federal student loans now carry fixed interest rates, whereas before, they offered variable rates. So basically, according to Mark Kantrowitz, a publisher of FinAid, there’s really not a financial benefit for consolidating federal student loans other than having one single payment as opposed to having multiple payments.

He adds that, as long as you can afford to make the loan payments, consolidation is not going to be that much more of benefit to you. However, those who are struggling to make their monthly payments are likely to find loan consolidation more beneficial. The thing to keep in mind is that, it may appear that you’re benefiting by consolidating your loan, but overall more is being paid in interest over the life of the loan. If you think about it, when stretching out for example, a 10 year student loan into a 20 year loan, your payments will be reduced by roughly 34%, however, students will end up paying twice the amount in interest throughout the 20 year period or over the life of the loan.

Kantrowitz also warms that students who consolidate their loans early on may not be able to consolidate the loan a second time, or take advantage of lower interest rates in the future.

Private Student Loan Consolidation

Generally speaking, as indicated above, private consolidated student loans cannot be consolidated with federal student loans. For the most part, federal consolidated student loans have lower interest rates that are not made available to private consolidated student loans. In any case, there are other options available to refinancing private consolidated student loans.

The majority of the private student loans do not compete directly with federal loans on price points. However, private consolidated loans are simply a private loan that is replaced with another private loan. Therefore, the primary benefit of obtaining a private consolidated loan is having one single monthly payment. Additionally, since the terms of a new private consolidated student loan gets reset, the monthly payment may very likely be reduced at cost. This however, increases the overall total interest that is paid during the lifetime of the loan.

The interest rates that are associated with private student loans are based on credit scores. So if you have a good credit score, you may be lucky enough to get a consolidated loan with a lower interest rate. The other good thing about credit scores being somewhat of a qualifier for loans with lower interest rates, is that if your credit score improves during the life of the loan, you may also obtain a lower interest rate loans as well. This doesn’t just happen however, you would have to monitor your overall situation and apply for another private consolidated student loan at a lower interest rate once you have noticed that your credit score has increased by 50 to 100 or more points.

Private student loans usually have interest rates that parallel the interest rates found in home equity loans. If your private consolidated student loan has a variable interest rate and you’d rather have a fixed rate, you can be a little strategic and use your fixed rate home equity loan to simply pay off the remaining balance of the private student loan. This allows you to lock in a fixed interest rate.

Federal Student Loan Consolidation

If you get a direct consolidated student loan, it will allow you to combine all of your federal student loans into one single monthly payment instead of making multiple payments.

When applying for a federal consolidated student loan, there is no application fee involved. So you should be concerned if you are approached by someone who is offering you a federal loan consolidation for a fee. Federal student loans are governed by US Department of Education (ED’s) and are managed by one of their consolidation services.

Before you make a final decision about whether or not to consolidate your loans, you may have some questions. For example, you may want to know:

What types of federal student loans can be consolidated?

While the majority of federal student loans can be consolidated, most include those indicated below:

Direct Subsidized and Unsubsidized Loans

• Subsidized and Unsubsidized Federal Stafford Loans

• PLUS and Direct PLUS Loans

• Supplemental Loans for Students (SLS)

• Federal Perkins and Federal Nursing Loans

• Health Education Assistance Loans

What will I give up by consolidating my loans?

Most student loans include many borrower benefits that are typically only available on original loans. These benefits could be compromised should you decide to consolidate your loans. Typical original benefits that you could be giving up consist of the following:

• Discount interest rates

• Principal rebates

• Various loan cancellation benefits

What if I experience financial hardship and began to struggle to repay the loan?

If you find that you’re having difficulty keeping up your student loan payments, even after the consolidation has taken place, you can consider income-based loans and / or a deferment or forbearance, both of which provide short-term, temporary payment relief.

At what point can I consolidate my federal loans?

Students basically become eligible to consolidate their loans after they graduate, when they discontinue attending school or if they become a less than a half-time student.

At what point am I required to begin repaying the loan.

Sometimes, the repayment of direct consolidated loans can begin as early as 60 days after the loan has been disbursed. In some cases, it could be sooner than that. Students should check with their loan servicer about when the payments must began and the first due date. The repayment period is normally anywhere between 10 and 30 years.

The Top Six Student Loan Consolidation and Refinancing Companies

At this point, you may be wondering where to begin with respect to finding a company with flexible payment terms and a wide variety of options based on what’s most suitable for you. Below are the top six student loan consolidation and refinancing companies that offer a wide array of options.

1. LendKey

Lendkey works with community banks to get students the lowest loan possible. They allow students to select monthly payments that are comfortable to them prior to submitting their loan request. They offer fixed and variable rates and have repayment terms in increments of 5, 10, 15 or 20 years. They have refinancing loans for undergrad and graduate students. They also offer refinancing for both private and federal student loans. They offer low-interest rates between 2.13% – 8.97%.

2. CommonBond

CommonBond provides students with low-interest student refinancing loans.  Their normal student loans result in students saving roughly $14,581 on average. They also offer both variable and fixed loans in the amount of 2.14% – 7.74%. They have repayment options in increments of 5, 7, 10, 15 or 20 years. They have loans available for the undergrad and the graduate student.

3. Earnest

Earnest has both variable and fixed rates between 2.20% – 7.45%. Their repayment options range from 5 to 20 years. They provide loans for both the undergrad and the graduate student and they offer refinancing for both private and federal loans. They have saved their clients roughly $17,936.

4. Citizens Bank

Citizens Bank offers both student and parent loans. They have a variety of features for their students. Including interest rate discounts, no application fees, which is an average saving of $637 for parents (when compared with loans through the Federal Direct PLUS Loan for Parents) and it saves graduates an average of $986, which is a great alternative (when compared to the Federal Grant PLUS Loan.) Loans usually range between $10,000 and $170,000 and is based on the student’s educational level. Citizens Bank offers both fixed and variable loans with interest rates between 2.19% – 9.39%. They offer flexible repayment terms in increments of 5, 10, 15 or 20 years and have loans to accommodate both the undergrad and graduate student.

5. College Ave

College Ave has very flexible loan options, including fixed or variable interest rates for undergraduate students. The rates began at 2.20% – 9.29% for variable rates (with an automatic pay discount) and a .99% – 11.24% for fixed rates (with an automatic payment discount.) They allow students to begin repaying their loan either immediately, or upon graduation. They can also determine how long they want to take before they repay the loan. Their repayment options include increments of 8, 10, 12 or 15 years. They don’t have application fees or prepayment penalties.

6. Sofi

Sofi is capable of consolidating all private and federal student loans. They have both fixed and variable rates and they do not have loan origination fees or prepayment penalties. They offer a wide range of rates and payment terms based on what works best for the student. There rates range from 2.20% – 7.74% with repayment options in increments of 5, 7, 10, 15 or 20 years. They have loans available for both the undergrad and the graduate student.

The great thing about seeking out the best student consolidation or refinancing loan is that these companies offer a wide variety of resources that they make available to assist you to obtain the knowledge you need to make the best selection prior to committing to a long-term consolidation or refinancing loan.

Additional Resources:
Student Loan Forgiveness
25 Best Companies to Refinance

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