There is more than $1 trillion in student debt out there today. If you are in debt with student loans, you are not alone. That does not make affording them any easier, though. If you cannot make your minimum payments, you have options. One of them is to consolidate them so that you only have one big loan. You should consider some things before consolidating your student loans, though.
Understand Student Loan Consolidation Options
If you have federal student debt, you may qualify for student loan debt consolidation. The premise of the loan is the same. You get one loan that pays off your many other loans. You then have one payment to make each month. The difference, though, is this loan only pertains to student debt. You cannot roll credit card, installment loan, or any other debt into it.
Student loan consolidation does not offer the same benefits as a private loan would offer, though. You can only receive the loan from the Department of Education. They will provide you with the funds and your new interest rate. It will be the weighted average of all of your student debts. This means you may get a lower rate than some loans, but not all of them. It is more a strategy of getting organized than saving money, in many cases.
Consolidating With Private Loans
You do have another option, though. If you do not want to take the loan offered by the Department of Education, you can take out a private loan. This works the same way any other debt consolidation would work. You apply for the loan with a bank. They process your application and decide if you qualify. They propose a specific interest rate and fees. You decide if the loan is right for you.
One of the largest benefits of consolidating with a private loan is the interest rate you may obtain. If you consolidate during a time that interest rates are low, you may save more money with a private loan. You also have the benefit of consolidating other debt into the loan. This can help you get out of debt all at once.
Qualifying for a Private Loan
There is a difference when you consolidate your student loans with a private loan, though. You must qualify for it. When you consolidate with the Department of Education’s loan, you do not have to qualify for the loan, at least financially. We will discuss this below. For now, let’s focus on a private loan. You can get a private loan from any willing bank. In order to apply, you will need to prove the following:
- Qualifying income
- Qualifying assets
- High enough credit score
Lenders will evaluate your financial situation to see if you qualify. Usually, with a private loan, you will have a lower interest rate, though. You may have to shop around to find a lender with a rate low enough, though. It does not make sense to consolidate if you can’t lower your rates, though.
Paying for Student Loan Consolidation
One major consideration is the cost of student loan consolidation. Not only does the interest rate matter, but the costs do too. It does not always make sense to consolidate if it will cost you too much money. Ask lenders what their fees are for the loan. A few examples include:
- Origination fee
- Processing fee
- Underwriting fee
- Document fee
- Closing fee
Once you know the fees, you can figure out if it makes sense. Compare the costs to the amount you will save each month. Total the savings over the life of the loan. Is it more than the closing costs? Is it enough to warrant the consolidation? Remember, banks are in business to make money too. They are not going to offer a loan for free. That does not mean you cannot shop around and find lower costs, though.
Understanding Interest Rates
When you shop for a loan to consolidate your student loans, do not focus on the interest rate number. Instead, look at the big picture. Ask how much interest you will pay over the life of the loan. Two lenders might give you quotes for different loan terms. It does not make sense to compare the interest rates on loans with differing terms. Instead, you should focus on the lifetime interest cost.
For example, let’s say Lender A offers you a 10-year loan at a 4.5% interest rate and Lender B offers a 5-year loan at a 5% interest rate. Your tendency might be to jump at the 4.5% interest rate. But, since you will have the loan out longer, you would actually pay more in interest. This is why asking what the full cost of the interest is will help you make a decision.
Qualifying for Department of Education Student Loan Consolidation
The Department of Education allows student loan borrowers to consolidate their loans as long as they meet the following:
- They are finished with school or at least not enrolled full-time
- They are not in default on their loan payments
- They have more than 1 federal student loan
The DOE does not look at a borrower’s income, assets, or credit score. They can consolidate their loans with the program. They receive the average of all of the interest rates of the loans involved. This may mean a rate slightly lower than some loans yet higher than others. It helps borrowers stay organized and stay current on their student loans though.
Private Consolidation or Federal Consolidation?
So you have 2 options. Which one is right for you? It is a personal decision. First, ask yourself why you want to consolidate. Are you just overwhelmed with too many payments? Maybe it is not that you cannot afford them, but that you cannot keep track of them. In this case, the Department of Education loan might suffice. You will get one loan and you will not pay many fees. Plus, you might be eligible for Loan Forgiveness down the road. This is offered by the DOE for borrowers that make 10 years of payments on their consolidated loan. You must work in a specific industry to qualify.
If you are overwhelmed by the amount of your payments, you may want a private loan consolidation. You have control over the interest rate and the costs of this type of loan. You can shop around with different lenders until you find the terms that are right for you. The federal student loan consolidation only offers one choice. Plus, you cannot include private student loans in with the federal student loan program.
If you cannot secure a private loan, you have one other option. You can use your home equity to consolidate your student debt. Be careful, though, because student debt is not secured debt. If you default, the lender cannot take your home. With a home equity loan, though, they can take your home if you do not make your payments.
Using a home equity loan to consolidate student debt works just like consolidating any other debt – you get a new loan and pay off multiple other loans. When you close on the loan, the lender disburses the funds. They can give them directly to you or they can pay your debts for you. Either way, you have one loan to pay. The interest rates on home equity loans are often lower than student loans because of the collateral you provide. Because the lender knows they can take your house if you do not make your payments, they do not have to charge high interest rates.
The Bottom Line
So is it smart to consolidate student loan debt? It depends on your situation. If you are in over your head in debt, then you should consolidate. Just how you consolidate depends on what you need. If you need a serious break in your payments, consider a private loan consolidation. You are more in control this way. You can shop around with different lenders and look at your different options. You may even use your home as collateral and consolidate with your home’s equity.
If you are not in over your head, you may want the ease of the federal student loan consolidation. You do not have to qualify for the loan. As long as you make your payments on time and have a qualifying loan, you qualify.
Either way, you make it easier to make your student loan payments. If you use your home equity, proceed with caution. Do not take a payment you cannot easily afford. This may only lead to disaster down the road. Whichever method you choose, you stand to save some money. This can help you get ahead in other areas in life. Make sure you shop around and look at all of your options before deciding.