Student Loan Consolidation – A Helpful Guide
Student loans can be overwhelming. Between keeping track of multiple loans, servicers, and payments each month, it’s easy to feel stressed about managing your student debt. That’s where student loan consolidation can help.At Delancey Street, we understand the burden student loans can place on borrowers. We’re here to help you understand consolidation – the pros, the cons, who it’s best for, and how to go about it. Read on for a helpful guide on everything you need to know about consolidating your federal student loans.
What Is Student Loan Consolidation?
Student loan consolidation allows you to combine multiple federal student loans into one new loan, resulting in just one monthly payment instead of many. It can make managing your student debt much more straightforward.With consolidation, the government pays off your existing federal loans and replaces them with a new Direct Consolidation Loan. This new consolidation loan has a fixed interest rate based on the weighted average of the rates on the loans you consolidate, rounded up to the nearest one-eighth of 1% – for example, 6.15% would round up to 6.25%.Consolidation does not lower your interest rate like refinancing can. But it can provide other benefits like simplifying payments, getting access to certain repayment plans, and more.
The Main Pros of Consolidation
There are several advantages consolidation offers:
- Simpler payments: Instead of multiple monthly bills to different servicers, you’ll have just one payment to make. This can make repayment much easier to manage.
- Access to additional plans: Consolidating can allow you to access income-driven repayment plans you didn’t previously qualify for. This opens up options like capping payments at 10% of discretionary income.
- Getting out of default: If your loans are in default, consolidation can get them out of default and back in good standing after you make 3 consecutive payments on the defaulted loan.
- Lower monthly payments: While your interest rate doesn’t go down, picking a longer repayment term of up to 30 years can significantly lower your monthly payment.
- Interest rate rounding down: In a small number of cases, the weighted average calculation can actually round your interest rate down slightly compared to your current rates.
- Federal protections remain: Consolidation does not cause you to lose access to federal benefits like deferment, forbearance, forgiveness programs, disability discharge, and more.
The Potential Cons of Consolidation
However, consolidation isn’t perfect. There are some potential drawbacks to consider:
- Higher total costs: That lower monthly payment likely means you’ll pay more interest over the life of the loan by extending the repayment period.
- Interest capitalization: Any unpaid interest you currently have will be added to the principal when you consolidate, increasing the total balance.
- Loss of past payments: Consolidation erases any payments you’ve made toward forgiveness programs like PSLF. An exception currently applies through 2023.
- No rate reduction: Unlike refinancing, consolidation does not let you lower your interest rate and reduce costs that way.
- Irreversible decision: Once you consolidate, you can’t undo it. The loans cannot be separated again later.
Overall, weigh the pros and cons of consolidation to decide if the benefits outweigh the costs based on your situation. Consolidation is the right choice for some borrowers but not others.
Who Is Student Loan Consolidation Best Suited For?
In general, student loan consolidation tends to make the most sense for these types of borrowers:
- Those who need to get their federal loans out of default
- Borrowers with FFELP loans who want to qualify for PSLF
- Those seeking lower monthly payments they can better afford
- Anyone with multiple federal loans looking to simplify repayment
- Those who don’t necessarily need interest rate reductions
Borrowers who do not have a real need for consolidation or who could benefit more from refinancing should look at alternative options. For example, consolidation may not be advisable for:
- Those pursuing PSLF (except FFELP borrowers)
- Borrowers who want to reduce interest rates
- Anyone seeking shorter loan terms and lower total costs
Look at your own student debt situation and needs to determine if consolidation would truly benefit you or not.
How To Apply for a Federal Direct Consolidation Loan
If you decide consolidation is your best course of action, applying is relatively straightforward. Here are the steps to take:
- Collect information on all your federal loans you want to consolidate, including loan types, balances, servicers, and interest rates.
- Login to StudentAid.gov and start the Direct Consolidation Loan Application.
- Select each loan you want to consolidate. You can leave loans out if desired.
- Choose a repayment plan. Opt for the standard plan or an income-driven repayment plan if you want to tie monthly payments to your income.
- Review terms and electronically sign the application.
- Continue making payments on your existing loans until the consolidation servicer informs you it is complete.
The consolidation process can take 30-60 days. You’ll deal with your new servicer once it is complete.
Alternatives to Student Loan Consolidation
While consolidation can be a solution, also look at these other options that may better fit your needs:
- Refinancing – Refinancing replaces federal and private student loans with a new private loan at a lower, fixed interest rate, reducing your costs.
- Income-driven repayment – IDR plans like PAYE and REPAYE cap payments at 10% of discretionary income and provide forgiveness after 20-25 years.
- Deferment or forbearance – Get a temporary pause on payments through deferment or forbearance if you’re struggling to pay.
- Extended repayment – Federal direct loan borrowers can extend repayment up to 25 years for lower monthly payments without consolidating.
- Public Service Loan Forgiveness – PSLF provides forgiveness after 10 years of payments while working full-time for an eligible employer.
Look at the pros and cons of each option to pick the repayment strategy that best fits your financial situation and goals. The right approach can make managing student loans much more affordable and achievable.
Common Consolidation Questions and Concerns
If you still have questions about the details of student loan consolidation, here are answers to some common queries:Which loans can be consolidated?Most federal student loans are eligible, including Direct Loans, FFELP loans, Perkins Loans, PLUS loans, and more. Private student loans cannot be consolidated.Does consolidation lower my interest rate?No, consolidation does not reduce your interest rate. The new rate is a weighted average rounded up to the nearest eighth of a percent.Can I consolidate just some of my loans?Yes, you do not have to consolidate all your eligible federal loans. You can choose to leave some out.How does consolidation affect credit scores?Consolidation has no direct impact on your credit scores since it is not a new credit application. However, simplified payments may help you stay current on your student debt and thus help your credit.Can I consolidate defaulted loans?Yes, consolidation can get federal loans out of default. You must either make 3 consecutive, on-time payments before consolidating or agree to repay under an income-driven plan.Will consolidation lower my monthly payment?Potentially yes, if you choose a longer repayment term like 25-30 years. But beware you’ll pay more interest over time.Can I still qualify for PSLF if I consolidate?Typically consolidating causes you to lose qualifying PSLF payments already made. But a temporary waiver allows payments to still count if you consolidate before 2023.
Let Delancey Street Help With Your Student Debt
Managing student loans can be complicated, confusing, and downright stressful. But you don’t have to figure it all out on your own.The student loan experts at Delancey Street are here to help. We provide borrowers with personalized guidance on picking the best student loan repayment strategy. Consolidation, refinancing, income-driven repayment, and more – we look at your specific financial situation and goals to identify the right approach for you.Get in touch with us today to get started. Our student loan advisors will be happy to answer your questions and analyze your options at no cost. Don’t let student debt overwhelm you – we can help you find the best path forward.