Upon graduation, most student loan borrowers have a number of student loans to their name. Many students are now looking to consolidate student loans in an effort to better manage their student loan debt. In this guide I want to help you consolidate student loan debt and save money in the process.
Student loans consolidation is a relatively new concept. In this guide we will look at federal student loan consolidation, private student loan consolidation, as well as the potential risks that may arise when you consolidate student loans.
Best Student Loan Consolidation Companies
Consolidating and refinancing private and federal student loans together is a great idea if you have multiple student loans, and are trying to save money. Student loan interest can be very high for some borrowers. Are you stuck paying 6% on your federal student loan debt? Or even worse on private student loans? You need to know that you can consolidate student loans to a lower interest rate with a private student loan lender.
There are plenty of private student loan refinance and consolidation lenders on the market these days. Private student loan consolidation is a rather new market, so the top lenders aren’t your traditional banks. When you consolidate student loans you will see that most lenders are unfamiliar names. The top lenders to consolidate student loans are SoFi, DRB, CommonBond, U-fi, and LendKey. Each of these lenders has unique product offerings and benefits. It is good to compare all of these lenders before refinancing with anyone in particular. SoFi is the top private student loan consolidation lender with over $3 billion in student loans refinance. SoFi is definitely a good starting point. The company has a wide variety of options available. Long term lengths, short term lengths, variable rates, fixed rates, mixed rates, the whole bag. The vast majority of private student loan consolidation lenders do not charge any fees for consolidation.
2.13% - 3.50%
Variable & Fixed
5, 10, 15, 20
2.18% - 4.74%
Variable & Fixed
5, 10, 15, 20
2.13% - 3.50%
Variable & Fixed
5 to 20
2.21% - 4.14%
Variable & Fixed
5, 10, 15, 20, 25
Federal Student Loan Consolidation
You can consolidate federal student loans through a Department of Education’s program called Direct Consolidation Loan. The Direct Consolidation Loan Program allows federal student loan borrowers to consolidate their federal student loans into one new federal student loan. If you are anything like most student loan borrowers, you probably have multiple federal student loans. Managing multiple student loans, payments, and interest rates is a difficult task. The Direct Consolidation Loan program was created to help federal student loan borrowers take control of their debt and to make repayment easier.
With the Direct Consolidation Loan program your federal student loans will consolidate into one new loan. You will only have one monthly payment, and one new interest rate. Your consolidated student loan interest rate will be a weighted average of your previous interest rates. You will not save money when you consolidate federal student loans through the federal government. Why? Well your total loan cost and interest rate will not actually change. If you are looking to save money on your student loans, you need to consolidate student loans through a private student loan lender such as SoFi.
You cannot consolidate private student loans under the Direct Consolidation Loan program. To consolidate private student loans you must use a private student loan consolidation company.
Private Student Loan Consolidation Rates and Benefits
The biggest benefit of consolidating student loans with a private lender is that you can save money on interest. Paying student loan interest isn’t easy when you have high interest rate student loans. But, if you consolidate you can dramatically lower your interest rate and save yourself thousands over the life of your loan.
Student loan refinance and consolidation interest rates start below 2% for very qualified borrowers. In fact, some private student loan consolidation lenders have rates as low as 1.90%. The rate you will receive varies depending on a number of factors including creditworthiness, term length, and interest rate type.
When you consolidate student loans through a private lender you can select a new term length and interest rate type. As a general rule, variable rates are about 1.50% below their fixed rate counterparts. That being said, fixed rates do have benefits. With fixed rates, you can know that you will pay the same amount for the life of your loan. Where as variable rates can change with market interest rates.
Moreover, if you choose a longer term length you will receive a higher rate in comparison to a shorter term length. To get that low 1.90% you will need to choose a 5 year term length with a variable rate, and have excellent credit. What is excellent credit? To have excellent credit you usually need to have a FICO credit score above 820. Depending on the credit bureau, you FICO score may vary by as much as 15 points. It is good to check all three of your credit reports regularly.
Risks of Private Student Loan Consolidation
Consolidating student loans has its risks like most financial decisions. When you consolidate student loans with a private student loan lender, you will lose your federal student loan benefits. What are federal student loan benefits? Most student loan borrowers have federal student loans, yet most borrowers have no idea that they are eligible for federal student loan benefits.
Federal student loan benefits come in two shapes.:
- Income-based repayment or IBR
- Public Service Loan Forgiveness
Income based repayment is just how it sounds. The repayment on your federal student loan debt can be tied to your income. Meaning, if you have low income, you can limit the amount you need to pay on your federal student loans each month. This is a great protection for borrowers going through financial difficulty.
Public Service Loan Forgiveness is a hot topic. Who wouldn’t want to get their federal student loans forgiven? If you consolidate student loans through a private student loan lender you will no longer have the ability to get your federal student loans forgiven through this program.
Can I Consolidate Student Loans on a Phone or Tablet?
Many student loan borrowers may be looking to consolidate student loans on a smartphone or tablet. I would advise against starting the consolidation process on a mobile device. You will find that a lot of the private student loan lender’s will require document upload during the application process. Moreover, the Department of Education’s website is pretty awful. NAvigating the Direct Consolidation Loan website on a smartphone is as easy as carving an ice sculpture in the middle of the desert. It is not easy to consolidate student loans on a smartphone.
I would recommend waiting until you have access to a desktop or laptop computer. If you don’t have access to a computer, you can visit your local public library for free access. Local public libraries might even be able to help you consolidate student loans.
Costs of Student Loan Consolidation
Consolidating student loans is a free process no matter how you look at it. Whether you consolidate through the Department of Education, or through a private student loan lender, you should never need to pay to consolidate.
You can fill Direct Consolidation Loan paperwork for free online through the Department of Education’s website. Never pay a paperwork company money to consolidate student loans on your behalf. The process is easy and may take less than an hour. Just be sure to have all of your federal student loan documents or statements on hand.
Private lenders will not charge you anything to consolidate student loans. There are no application, origination, or pre-payment fees. Meaning, you can pay off your loans early and no pay any fees.
How Long Does it Take to Consolidate Student Loans?
Student loan consolidation can be a lengthy process depending on the type of loans you have and the route you decide to take. In general, federal student loan consolidation is a hassle and takes a long time. If you are looking to consolidate student loans quickly, you are better off going with a private lender. SoFi can usually complete the consolidation process in about 10 days. The application will only take you about 15 minutes. After that, SoFi will take a couple days to approve your application. You will then sign the promissory note. Then, you just need to wait for SoFi to pay off your old loans and issue your new loan.
How to Choose the Best Student Loan Consolidation Lender
If you are looking to refinance your student loans for a better interest rate, then you aren’t the only one! In fact, an overwhelming number of student debtors are turning to student loan consolidation and refinancing to help them beat their student loan debt.
While “student loan consolidation” is technically an option offered by the federal government, keep in mind that student loan refinancing pertains to the option offered by private lenders. With that being said, student loan refinancing and consolidation are terms that are used interchangeably, but the sole focus of this segment is how to pick a private lender for student loan refinancing.
Just a recap on what this service entails, if you are refinancing your student loans, then that means they are consolidated into one total sum (the old individual loans are paid off by a loan of this amount). Now your debt is with the private lender.
Back to the point, how do you go about choosing the best student loan consolidation lender? After all, there are plenty of different factors to consider. Here are a few tips to get you started.
Compare Interest Rates
The first thing that you will want to do is compare the interest rates of the leading lenders in the industry. Interest rates are going to vary depending on the market prime rates. Remember that when rates are at a low, it is ideal to refinance with a fixed interest rate. When rates are higher, however, you may want to go with a variable rate. In general, fixed rates are set higher than variable rates due to this market influence.
Sometimes, rates with some companies may not even be any lower than what you are already being charged, so make sure you compare your current rates with any potential new ones! As a general rule, a lower rate means that you pay less in the long run.
Compare Term Length Options
Another important factor that you will want to look at when comparing lenders is their term length options. Different lenders offer a variety of options when it comes to loan repayment terms. Terms vary between 5 and 25 years depending on who you look at.
Term length plays a really important role in how much you will be paying over the lifetime of your loan, so you need to pay attention to the interest rate and loan term combination. For instance, if you have a twenty year term, you will be charged interest at an annual percentage rate for those twenty years. Sure, your monthly payments may be lower, but you are paying much more than you have to in the end.
Consider Flexibility with Payment Options
Many lenders offer flexible payment options, so it is up to you to pick which one fits your financial situation the best. Many lenders will even let you choose what day of the month you want your payments to be due. Some will give grace periods while others may offer deferment options in case you have trouble with payments.
Picking the right payment options is extremely important because it can make or break your loan performance. You really never know what the future may hold, so when it comes to repaying your loans, it helps to have a company that is willing to work with you.
Check Eligibility Requirements
Each student loan consolidation and refinancing lender is going to have a different set of eligibility requirements. Some lenders may require that you have already earned a degree of some sort while others may work with you during school. Additionally, many lenders have minimum and maximum loan amount requirements. Lenders have different underwriting criteria as well, so you’ll need to research their application criteria to learn what these lenders take into account.
Use Student Loan Consolidation Calculators to Ensure the Best Deal
When you are looking at student loan consolidation lenders, you may find that many of them have calculator tools on their website. These allow you to input student loan information; afterwards, the tool outputs an estimated savings total. By doing this, you will be able to see which company has the most to offer in terms of savings in the long run. After all, most student debtors that refinance their student loans do it so that they can save money. Just remember, these calculators are accurate, but they require you to input accurate information.
Research and Avoid Consolidation Scams
Last, but certainly not least, you will want to make sure that you avoid consolidation scams. There are plenty of scammers out there who make it easy to find their “service.” These companies capitalize on unwary borrowers more often than most people realize. This is why you should always do your research ahead of time and check out lenders that have a good reputation.
Final Thoughts on Choosing a Student Loan Consolidation & Refinance Lender
As you can see, choosing a student loan consolidation lender is nothing like choosing salad dressing. Unfortunately, if you don’t like your lender after trying them, then you can’t simply throw away the deal. As was reiterated many times, it requires thought, research, and planning. By taking your time to compare and contrast lenders, you can rest assured that you have chosen the lender that has the most to offer for your particular situation.
Student Loan Consolidation – Is It Really Your Best Option?
So, you’ve got a lot of student loan debt and you’re looking into consolidation. It is not the worst thing that you can do if you have a lot of debt, especially a good deal of private loan debt. You can lock in one rate and keep everything simple to be certain.
However, it is not always the best route to handling your finances, it will depend on lot on what type of consolidation plan you choose, the terms, the payment period, the rate, and of course the types of loans that you acquired.
Again, if you took on a lot of private loans and there is an adjustable rate that is consistently going up, you should look carefully at consolidation, as locking in your rate could be to your advantage. Talk to a financial professional to get solid advice, in fact you should probably talk to more than one to get a variety of points of view. Choose somebody in the industry that doesn’t have any type of financial gain from your situation and you should get the real deal, honest information.
A lot of people use debt consolidation with the wrong intent, they seek to lower their monthly payments at any cost so they can free up money for other things. While this feels great in the short term you are lengthening the loan repayment period which will mean paying more in the long term. That doesn’t make good financial sense.
If you consolidate all your loans with a shorter repayment period then it may make good sense, you’ll pay more per month but you will get to the finish line faster. It really depends on how you use the consolidation to your advantage.
Rolling private and federal loans into one consolidated loan could be to your disadvantage as you may actually lose some of the benefits of having federal loans. Federal loan repayment is capped for those who aren’t making a great income quite yet; so you really have to pay close attention to your own particular situation.
If you roll all of your student loans into one you cannot take advantage of paying down the smaller loans faster than the larger loans. This can be a serious disadvantage, so you have to play out all the different scenarios to figure out what will work best for you. By paying down the smallest loan first you eliminate it and with it all the interest payments, over time this is a great strategy and can easily lower the interest amount that you pay over the long term, and faster too.
You want to avoid default as much as you possibly can, so if stretching things out and consolidating your loans makes sense to avoid default then it is to your advantage to deploy such a strategy. How you approach paying back your loans has a lot to do with how your want your lifestyle to be in the short term vs. in the long term, and as a mature adult you’ll usually want to opt for long term strategies, at least when it come to your finances.
Other Student Loan Repayment Strategies To Consider
Short-term thinking will usually put you in a worse financial picture, especially if you want to live the luxurious lifestyle right now. Many of the very wealthiest went through periods of life where they saved and lived beneath their means in order to have a better financial picture in the future.
So, we’re going to look at ways to improve your financial picture with regards to paying down your student loans, consolidation is just one option of many. If you play your cards right you’ll be looking at a great financial future.
The serious truth is that paying down your student loans faster rather than slower frees up a lot of money in the long term, and we’re not talking about small sums of money either. The faster you pay these loans off the more you will save in interest. Thousands of dollars.
In order to do things the right way we need to look at your entire financial picture and not just your student loans. There are much worse forms of debt to have than student loans, and this bad debt needs to be eliminated first. The worst types of debt, and the kind that most people probably already have would be credit card debt and auto loan debt.
Auto loan debt can actually be decent debt depending on your credit score, if you have a poor credit score and you go to finance an automobile this can very easily be a high interest debt. High interest debt is always bad, the higher the interest the worse the debt. So, take a look at your debt picture and find the highest interest debt and look to pay that off first.
But wait, before you even get started with your high interest debt you will want to set aside around three months of living expenses into a savings account. Why would you want to do that? It’s just sitting there doing nothing, you’re not even attacking your debt. Well, this is your insurance against the unexpected. Nobody’s job is completely secure, nobody’s health is completely secure, and everyone needs that cushion to prevent disaster.
Imagine what it would be like if you lost your job for six months? How would you pay those bills? For most of us it would be a nightmare. The chances of falling behind on your debt repayments skyrockets if you don’t have this cushion, so this is your first insulation from default.
Once you have this saved up, it’s time to attack the high interest debt. If you have a high interest auto loan it is probably not as high interest as your credit card debt, as credit card debt is the highest around. So you’ll want to focus on that first and foremost.
The best strategy to getting ahead in life is to have a lot of assets and few liabilities, debt is huge liability. So, pay down the lowest credit card balance to zero first. This will greatly benefit your credit score fast. As your credit score is based, in part, on an aggregate of the balances on your revolving credit lines.
Paying one credit card balance to zero will automatically lower the ratio of debt to credit. Keep that balance low and pay it off every month. Next attack the next line of credit, working your way up the ladder.
Now, it must be said that while you’re doing this not only is your financial health improving you credit score is also going up. This will benefit you with lower interest debt in the future, and if you do decide that you want to consolidate your student loan debts at some point in the future, you high score will earn you a lower rate. It is a win – win situation.
So, you’re got your plan in place, you’ve saved up your emergency fund, and you’ve knocked down your high interest debts, what’s next? Well, while you’re doing all that you should be looking for ways to put more money in your pocket and ways to keep more money in your pocket.
Most of us work long hours and we don’t even want to think about getting a second job, however, if you have a lot of student loan debt as well as a lot of other debt this might be a necessity. You’re part time job doesn’t have to be something that you hate. Try to find something that you love doing and get paid for it. Freelance writing, setting up websites, or something social like bartending will all put extra money in your pocket and get you ahead of the game.
Now, you’re cooking, you’ve got your debt reduction plan in place, you’re working overtime, now what? It’s time to take a good hard look at your budget and shrink it wherever possible. So, take a month and write down every penny that you spend. Nothing is off the chopping block, you need to know where your money is going.
You will frankly be shocked to discover that you’re spending hundreds of dollars on things that just aren’t necessary, like Starbucks coffee, trips to the movies, a huge cable package, video games, books, you name it. Think of smart ways to eliminate this type of spending, instead of buying books, get them from the library, get a French press and make your coffee at home, instead of going to the movies, buy one from your cable provider, and do it a little less often. If you free up even an extra hundred dollars a month, at the end of one year you will have knocked out another one thousand dollars of ugly high interest debt.
Other Ways To Get Your Debt Knocked Down
If you have a lot of student loan debt and you’re looking for alternative ways to knock it down, you may be surprised that your choice of employment offers you some benefits. As far as federal debt goes, you may qualify for loan forgiveness if you are a teacher, a police officer, or work for a non-profit organization.
In addition you can go and volunteer with organizations like the Peace Corps in order to have your debt tab reduced. You get to help others in need, travel, and you’ll get some of your federal debt removed to book, we’d call that a win – win situation.
Did you know that a portion of your student debt is tax deductible if you earn under $60,000 per year? That’s right you can get as much as $2,500 off your tax bill if you simply have all your records in order and fill our your taxes correctly.
That might set you up with one heck of a refund check at the beginning of the year? If you have your emergency fund taken care of, your high interest credit card debts wiped, then why not put that money, or part of it, towards reducing your student loans.
Sure it may feel better to take that money and go to Aruba, but when you get back from the trip that debt is still there hanging over your head.
A little known additional tip is to pay your student loans twice a month instead of once, you will pay a tiny fractional more but you will start to get ahead on paying things down faster; and anything that helps you pay these down faster is simply putting money into your pocket.
In Review – Consolidation Of Student Loans Is Just One Option Of Many
Student loan consolidation isn’t always a negative option, and if it helps you survive defaulting on your student loans then it’s a very positive one. The main thing to take away is the notion that you should never use consolidation in order to fund a lifestyle which you couldn’t maintain without increasing your overall debt loan.
This is folly and just isn’t the behavior of a mature adult. And besides once you have your loans paid off and you’ve saved yourself thousands of dollars then you can take that trip to Aruba and when you get back you won’t have any debts. Living life under a pile of debt is taxing on the soul and on the wallet, it’s not how you want to live.
If you do choose loan consolidation of your student loans then try to clean up your credit score in advance and get the best possible rate, in addition you’ll want to schedule the repayment length to as short a length as possible. Also, if you have both federal and private loans you need to be particularly careful about consolidating everything.
Becoming a mature adult means making tough decision every day, no one said it would be easy. The simple fact is that debt is a major liability in your life, it looms over your head and can bury you in the event of the unexpected. Therefore chipping away at the debt as fast as possible is paramount. Attack your high interest debts first, build your emergency fund, and whittle away higher interest student loans in the next phase and you will quickly move out of your early life stage being debt free.
Being debt free means freedom to do more, get better interest rates, as well as having the ability to really start in invest in your future with a home purchase, starting a business, or whatever else you want to do accomplish. If you need student loan consolidation to get you to this place then my all means use it, but don’t use it to fund a silly lifestyle and you’ll be a whole lot happier in a few short years.
So you've heard all about plenty of different debt strategies for your student loans, but let's move the conversation specifically back to student loan consolidation. After all, you might be confused what to look for when shopping with different lenders.