How to Do a Student Loan Consolidation

Stacy Zeiger
student loan applications

If you have multiple student loans or want to lower the interest rate and monthly payment on your student loan, you may be a candidate for student loan consolidation. Doing so will help you manage your student loan debt and potentially help you pay off your loans faster. However, if you want to consolidate, you must have an eligible loan type and you must do your research to make sure you're working with a reputable lender.

Eligible Loan Types

How you consolidate your loans depends on what types of loans you have. The U.S. Department of Education offers a Direct Consolidation Loan that allows you to consolidate most federal loans, but not private loans. Other lenders may offer you the opportunity to consolidate private student loans with the fees and interest rates varying by company.

Federal Loan Types

If you opt to consolidate with a Direct Consolidation Loan you can consolidate one of many federal student loan types. They include:

  • Direct Subsidized and Unsubsidized Loans
  • Subsidized and Unsubsidized Stafford Loans
  • Federal Perkins Loans
  • PLUS Loans
  • Federal Nursing Loans
  • Health Education Assistance Loans

In addition to having one of the eligible federal loan types, your loan must not currently be in default. Should you have defaulted on your loan before you can consolidate it, you must contact your loan servicer and agree to one of three plans for repaying your loan.

Private Loan Consolidation

The types of loans eligible for private loan consolidation vary by lender. Some consolidation companies will allow you to consolidate both private and federal student loans, while others only deal with private student loans. Many also set minimum loan amounts, income levels, credit score requirements or only consolidate loans used to obtain certain degree types. For example, CommonBond has a $10,000 minimum and only consolidates loans for graduate program alumni from schools in the CommonBond network. iHelp has a $25,000 minimum and requires an annual income of $24,000 or greater to qualify for a consolidation loan.

Applying for a Direct Consolidation Loan

Applying for a Direct Consolidation Loan can be done in multiple ways. The program offers a web application, express phone application, and paper-based application. To fill out any of the applications, you will need the following information:

  • Social Security Number
  • Federal Student Aid PIN (if applying online), available through the U.S. Department of Education.
  • Loan Servicer Name (For each loan you wish to consolidate)
  • Loan Account Number (For each loan you wish to consolidate)
  • Estimated Payoff Amount (For each loan you wish to consolidate)
  • Current loan servicer name, account number, and balance of each loan you don't want to consolidate

You'll also have the opportunity to choose your desired repayment plan. The plans available include:

  • Standard Repayment Plan, which can range from 10-30 years in length
  • Graduated Repayment Plan, which has your monthly payment gradually increase over a period of 10-30 years
  • Extended Repayment Plan, which offers fixed and graduated repayment options for a period of 25 years
  • Income-Based Repayment Plan, which allows for you to pay 10-15 percent of your income, so long as it doesn't exceed your monthly payment on a typically 10-year repayment plan, with a repayment period of 25 years
  • Pay As You Earn Plan, which allows you to pay 10 percent of your income over 20 years
  • Income-Contingent Plan, which allows you to pay 20 percent of your income over 25 years

You must decide which type of repayment plan will offer you the most manageable payments without saddling you with tons of extra interest, but your loan servicer will help, as will the Repayment Estimator offered by the U.S. Department of Education.

Applying for Private Loan Consolidation

The application process for a private loan consolidation will vary by company. When looking for a company, you should ask the following questions:

  1. What type of loans do they allow me to consolidate?
  2. What interest rates do they offer?
  3. Are the interest rates variable or fixed?
  4. Do they require a co-signer?
  5. Do they have a credit score requirement?
  6. Are there any application fees or other fees?
  7. What repayment terms do they offer?
  8. Are there any other benefits that come with consolidating with this lender?

Asking these questions will help you connect with the lender that will offer you the lowest interest rates and the repayment terms that best fit your needs. If you can, try to avoid lenders that have an application fee or that penalize you for paying off your loan early.

When you find a lender to apply with you'll need to know the following information for each loan you want to consolidate:

  • The lender's name and address
  • The account number
  • The outstanding balance
  • The current monthly payment
  • The current interest rate
  • Whether the interest rate is variable or fixed

Loan Approval Process

While a federal student loan consolidation will almost always be approved, you may not always find it easy to receive approval for a private student loan consolidation. Lenders will look at your credit score and consider whether you have a co-signer when making their decision. When applying, make sure you meet all the private loan requirements and, if you have a low credit score, ask a parent or family member to co-sign for you to increase your chances of being approved. Your credit score and the presence of a co-signer will also help determine your interest rate. A lower credit score equals a higher interest rate and, therefore, a higher monthly payment, but adding a co-signer can reduce that amount. If your parents or other family members are leery about co-signing, look for a loan with a co-signer release program that allows you to use a co-signer to help you get the loan, but offers the opportunity to release the co-signer after a series of on-time payments.

Issues With Consolidating

Combining multiple loans into one loan with a low interest rate and more flexible repayment terms seems like a no-brainer, but in some instances consolidation may not be your best option.

Paying Interest

With a consolidation loan, you have the option to extend your repayment period. This means that instead of the traditional 10-year repayment plan, you could extend your loan to a 15, 20, or even 30-year repayment plan. While this will significantly reduce the amount of your monthly payments, it will increase the amount you pay in interest.

Along with paying more interest over the life of the loan, you also want to look at the specific interest rates of the loans you plan to consolidate. If one loan has a fixed interest rate that's lower than the interest rate of your consolidation loan, you may want to leave that loan out of the consolidation and continue paying on it separately.

Loan Forgiveness Options

If you have a federal loan and choose a specialized career path, you may have the option of loan forgiveness. This is a specified amount of money forgiven from the balance of your loan. For example, teachers in low-income districts could earn around $5,000 in loan forgiveness. Similar programs are available for nurses, police officers, and even those who serve in the Peace Corps. If you consolidate your federal loans with a Direct Consolidation Loan, you keep these benefits, but opting to consolidate with a private lender will keep you from enjoying these benefits.

Deciding to Consolidate

If you've considered all the issues and have determined whether you want to consolidate your loans through the federal government or a private lender, do it today. Since consolidation loans can reduce how much you're paying in interest and lower your monthly payment, you should start the process as soon as possible to avoid making payments at a higher interest rate. Once you get your loans consolidated and your monthly payment amount set, you can start tackling your student loans and working to pay them off.

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How to Do a Student Loan Consolidation