Student loan consolidation is something that almost any student with education loan debt should take into consideration, as it can potentially reduce monthly payment amounts, as well as decrease the overall costs of student loan debt.
Consolidating student loans typically consists of taking out a completely new loan that will pay off the current amount of student loan debt that you may have.
You will be left with an entirely new loan to payback instead of having multiple student loan payments to make like you would have if you didn’t consolidate. Because the new loan you get will have new terms, including a different interest rate and repayment term, you can potentially lower your monthly payment, or reduce the overall costs of your entire body of education loan debt.
Different Types of Debt
There are three types of debt that you may be able to consolidate via student loan consolidation:
The type of consolidation loan and lender you seek out will depend on whether or not you have all three, or perhaps just one of the previously mentioned types of debt. This is because only certain lenders will be able to offer you a consolidation for more than one form of debt, with most lenders only willing to provide consolidation loans for students with one kind of debt.
Regardless of what sort of debt you have you still should have an understanding of the different types of consolidation loans that may be available to you. This will make figuring out how to apply and the process of finding a lender much easier, and it will help you avoid getting the run-around when you begin to seriously consider your options.
Federal Direct Consolidation Loans
If you only have federal student loan debt, or if you only want to consolidate your federal student loan debt, the first consolidation loan that you should consider applying for is the Federal Direct Consolidation Loan. This loan is not that much different than some of the other federal education loans that you may have received as part of the Direct Loan Program, as it is another kind of Direct Loan that is provided directly by the Department of Education.
A Direct Consolidation Loan should be able to consolidate most of your current federal student loans, including FFELP Loans that are no longer being offered by the federal government. Stafford Loans, Perkins Loans, PLUS Loans, and Health Professions Loans can all be consolidated via this type of consolidation loan—private student loans and other types of debt cannot be consolidated via the Direct Consolidation Loan.
To become eligible you must have at least one of your federal education loans to be in grace, repayment, deferment, or default status. Loans that are currently in “in-school” status are not eligible for a Direct Consolidation Loan.
Applying for this type of consolidation loan is easy, and is not much different than completing the FAFSA. You are encouraged to apply with a cosigner if you have bad credit, and you can complete the application online at the website loanconsolidation.ed.gov.
Private Student Loan Consolidation
Private student loan consolidation is not that much different from federal student loan consolidation except for the fact that you are only going to be consolidating your private education loan debt, and not your federal debt.
While some lenders may be able to still consolidate both forms of student loan debt, you are going to have to seek out a private lender that is willing to provide you with a consolidation loan for only your private debt.
This means that you will typically have to have at least a minimum amount of private education debt, although lenders will usually have maximum amounts that they are willing to consolidate as well.
These loans are most often based on credit, and you therefore will need to have a good credit score and a substantial income in order to get an approval. Applying with a creditworthy cosigner is recommended, as this can greatly reduce your interest rate and give you a better repayment term.
Most private consolidation loans range in length from anywhere between twenty, and thirty years, although this can be shorter or longer depending on the lender. You will most likely pay more than you would for this type of consolidation loan than you would for a federal consolidation loan, although if you have really good credit you may be able to get a very low interest rate.
While the number of lenders that offer private consolidation loans has dwindled over the past few years, there are still a few very good and reputable lenders left on the market. I recommend that you at least consider Chase as a lender, as I have heard good things about their business and consolidation loans—their website can be found at chaseprivateconsolidation.com.
Final Notes on Student Loan Consolidation
While I have only covered the two main categories of consolidation loans, there are still other kinds of loans that you can get that may be able to consolidate all of your debt, even non-education related debt. The lenders that provide these types of loans were much more prevalent a few years ago before the credit markets tanked, although you may be able to still find a similar lender if you are willing to do some digging.
As of right now I would recommend only trying to consolidate either one type of education debt at a time, via either the Federal Direct Consolidation Loan, or through a lender that can provide you with a private consolidation loan.
Remember that you should wait until you graduate before you seriously consider consolidating your student loans, and you should never overlook what getting a creditworthy cosigner can do for your application.