Federal loans to consolidate student debt

There are two types of student loan consolidation loans: federal and private. Federal consolidation is only for federal student loans. Private consolidation is also known as refinancing..

Many of these processes are confused, but they are very different. Here we explain them:

The federal loans to consolidate student debt combine several federal loans into one through the Department of Education. You may have to consolidate to be eligible for some federal loan repayment programs, but federal consolidation will not lower your interest rate. It could lower your payments by spreading them out.

Student loan refinancing, also known as private student loan consolidation, is a financial move that takes place through a private lender. If you qualify, you can save money by getting a lower interest rate.

Editor’s note: President Joe Biden’s administration recently declared that the federal student loan repayment pause will be extended for another 90 days. It was scheduled to end on February 1, 2022, therefore, the new date is May 1, 2022. And from that moment, federal student loan debts must be paid at the stipulated interest rate at the time of obtaining the loan.

Consolidation vs refinancing

Student Loan Consolidation Student Loan Refinancing
How does it work? Combine multiple federal loans into a single federal loan. Combine private and/or federal loans into a single private loan.
What loans can I combine? Federal loans only. Private and/or federal loans.
Can I lower the rates? No Yes
Can I save money? No. Consolidation may lower your payments by extending the term of the loan, but the amount of interest will increase Yes
Can I access federal loan protections, repayment options, and forgiveness programs? Yes No
Will I pay only one monthly bill? Yes No

How to Consolidate Private Student Loans

Consolidating or refinancing private student loans means replace multiple student loans (private, federal, or a combination of both) with a single new private loan. You’ll save money if your new loan has a lower interest rate.

Your financial history (including your credit score, income, work history, and educational background) will dictate your new interest rate when you refinance. As usual, you need a credit score of at least 600 to qualify and rates range from 2% to more than 9%.

Consider refinancing if:

  • You’ve made a few on-time student loan payments after leaving school.
  • You have good or excellent credit, generally defined as credit scores of 690 or higher.
  • You have a stable job.
  • You have a co-signer with these characteristics.

Refinancing federal student loans into a private loan means lose specific consumer protection for federal loans. Those include the option to tie payments to income and loan repayment opportunities.

Like the federal government, private companies offer the option of consolidating multiple student loans into one. However, you cannot transfer private loans to the federal government, but you can consolidate both federal and private loans with a private lender.

The objective with this process is not only to take advantage of the benefit of making a single payment, but receive a lower interest rate based on your financial history.

Use a consolidation calculator to compare monthly payments under three different scenarios: federal student loan consolidation, private student loan refinancing, and income-based repayment plans.

Current rates from private refinance lenders

Federal loans to consolidate student debt

Federal loan consolidation has no credit requirement and offers the benefit of a single loan bill and lower payments. But it’s only for federal loans and won’t lower your interest rate.. Consider federal consolidation if:

  • You need to consolidate to be eligible for income payment or Public Service Loan Forgiveness. This is the case if you have Federal Family Education Loans, Perkins, or Parent PLUS Loans.
  • You want a single payment on a federal loan, but you don’t need it to be much lower.
  • You’re in default on student loans and want to catch up.

When you consolidate federal loans, the government pays them off and replaces them with a direct consolidation loan.. You are generally eligible once you graduate, drop out of school, or drop half-time tuition. The consolidation of your federal loans through the Department of Education is free. It is not necessary to resort to companies that charge fees to help you consolidate them.

When you consolidate your federal loans, your new fixed interest rate will be the weighted average of your previous rates, rounded up to the next ⅛ of 1%. So, for example: If the average reaches 6.15%, your new interest rate will be 6.25%.

What’s more, you will get a new loan term of 10 to 30 years. The repayment term will generally begin within 60 days of the first disbursement of the consolidation loan and will be based on the total balance of the federal student loan, among other factors.

Federal loans to consolidate student debts: How to apply?

You can complete a consolidation loan application at studentaid.gov. You must complete the application in one session, so it is important that you gather the documents that appear in the section “What do I need?” before starting and reserve about 30 minutes of your time to complete it.

1.- Select the loans. Enter the loans you want to consolidate.

2.- Choose a payment plan. You can get a payment term based on the loan balance or choose one that ties payments to income. If you choose a plan based on income, you will fill out an Income-Based Payment Plan Request form below.

3.- Read the terms before submitting the online form. Continue making student loan payments as usual until your servicer confirms that consolidation is complete.

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