Is Federal Student Loan Consolidation Right for You?December 12, 2019
By Caroline Farhat
If you have federal student loans, there is a good chance you’ve heard the word “consolidation” before. But do you know what it really means for you and how it affects your loans? When you have student loans it’s important to understand your different options, whether it’s to refinance student loans or consolidate them, because it can be key to saving you money now and in the long run. Whenever the concept of student loan consolidation comes up, inevitably refinancing does too. Let’s clear up some confusion about how these two options differ.
Are student loan consolidation and student loan refinancing the same thing?
Student loan consolidation is not the same as student loan refinancing. While refinancing student loans allows you to change (AKA lower) the interest rate on your student loans, consolidation does not reduce the interest rate on your student loans. We’ll discuss how consolidation affects your interest rate below.
Bottom line: Consolidation simply means that you are combining multiple federal loans into one loan. It helps you streamline the loan repayment process by giving you one bill to pay each month instead of several bills to keep track of.
Should I consolidate my federal student loans?
When deciding whether to consolidate federal student loans, there are a lot of factors to consider. It’s important to keep in mind that if you have private student loans you cannot consolidate your loans through the government. If you have private loans, your best bet is likely student loan refinancing.
If you do have federal student loans, here are some things to keep in mind when considering whether to consolidate:
- First, make sure you qualify. In order to consolidate federal loans, your loans must be in repayment or in the grace period. This typically happens when you graduate, attend school part-time, or leave school.
- Consolidating student loans will allow you to have just one bill to pay, rather than multiple bills. This can help make it easier to keep track of your finances and reduces the risk of missing a payment or paying a late fee.
- Consolidating will affect the interest rate you pay—and not in a good way. When you consolidate, the federal government takes the midpoint between the highest and lowest interest rates from your individual loans and rounds up to the nearest one-eighth of one percent. This new weighted average is what you’ll pay on your consolidated loan. If you’d like to dive deeper into how interest rates are determined by consolidating federal student loans with the Direct Consolidation Program, visit this blog.
- Consolidating student debt may help you lower your monthly payment, but it is less likely to save you money in the long run. In fact, you are likely to pay more money in interest in the long run because the life of the loan is extended. Additionally, since the life of the loan is extended you are stuck with student loan debt longer. For some people, this mental burden can be a huge negative.
- Federal student loan consolidation still allows you to be eligible for certain programs such as deferments, forbearances, and student loan forgiveness. Consolidation may also allow you to repay your loans under certain income-based repayment plans.
- If you are currently repaying your loans under an income-based repayment plan or if you’ve already made payments towards Public Service Loan Forgiveness (PSLF), you may have to start over with the number of payments you need to make. It’s important to note that you do not have to consolidate all of your loans. You can pick and choose which loans to consolidate that would benefit you the most. The Student Aid website provides a good example of when it would make sense to only consolidate certain loans:
“For example, if you have both Direct Loans and other types of federal student loans, and you have been making payments toward PSLF on your Direct Loans, you should not consolidate your Direct Loans along with your other loans. Similarly, if you have Federal Perkins Loans and you are employed in an occupation that would qualify you for Perkins Loan cancellation benefits, you should not include your Perkins Loans when you consolidate. Leaving out your Direct Loans or Perkins Loans will preserve the benefits on those loans.”
- Once your loans are consolidated, you cannot go back. So it’s to your benefit to do your research before filling out the application.
How to consolidate your federal student loans
The process to consolidate your federal student loans is a rather straightforward and easy process. There is no fee to consolidate.
If you’ve read the pros and cons and feel that consolidation is the best fit for you, here are the steps to take:
- Gather all of the information about the student loans you currently have and want to consolidate. You will need to know the loan servicer, account number, and payoff amount.
- Go to the Student Aid website, click the Repayment & Consolidation tab and go to “Complete a Consolidation Loan Application and Promissory Note”. Here you will be prompted to log in to the website to complete the application.
- It can be a pain, but you will have to fill out the application in one session so be sure to collect all the required documents before you start the application. It should take around 30 minutes after you have gathered everything you need.
One payment is nice, but I want a better rate too. What can I do?
When you consolidate your federal student loans with a private lender, you are essentially refinancing your student loans. If your goal is to save money in the long run, student loan refinancing with a private lender is likely your best option as it provides the benefit of a single student loan payment but when you refinance federal student loans you can also receive a better rate.
Let’s take a look at the numbers. For federal student loans disbursed after July 1, 2019, and before July 1, 2020, the fixed interest rate for direct subsidized and unsubsidized undergraduate student loans is 4.53%. ELFI currently offers fixed interest rates starting at 2.47% APR* – with no application or origination fees.¹ Depending on your specific situation, refinancing could mean thousands of dollars saved over the lifetime of your loan. You can see how much you can save with refinancing by putting your information into our student loan refinance calculator.
Staying informed about your student loan options is key
Unfortunately, ignoring your student loans won’t make them disappear. Regardless of whether you decide to refinance student loans or consolidate them, staying informed about your options and talking to trusted resources (such as an ELFI Personal Loan Advisor) can be the best way to take control of your finances and stress less about your student loans.
*APR=Annual Percentage Rate.
¹Education Loan Finance is a nationwide student loan debt consolidation and refinance program offered by Tennessee based SouthEast Bank. ELFI is designed to assist borrowers through consolidating and refinancing loans into one single loan that effectively lowers your cost of education debt and/or makes repayment very simple. Subject to credit approval. Terms and conditions apply. Interest rates current as of 09-28-2021. The interest rate and monthly payment for a variable rate loan may increase after closing, but will never exceed 9.95% APR. Interest rates may be different from the rates shown above and will be based on the term of your loan, your financial history, and other factors, including your cosigner’s (if any) financial history. For example, a 10-year loan with a fixed rate of 6% would have 120 payments of $11.10 per $1,000 borrowed. Rates are subject to change.
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