Why Consolidate Student
Loans?
A borrower would consolidate student loans to better
organize and manage student loan repayment.
When student loans graduate from college or graduate school,
they have multiple options to help manage their student loans.
With federal student loans, they have access to multiple
student loan repayment programs, such as PAYE, REPAYE, Income-Based Repayment,
Income-Contingent Repayment and other repayment programs.
While repayment programs can be effective short-term
solutions, borrowers should recognize that student loan interest will still
accrue on their student loans.
How to Consolidate
Student Loans
For federal student loans, students who consolidate student
loans combine their existing federal student loans into a Direct ConsolidationLoan.
A Direct Consolidation Loan has one interest rate, one
monthly payment due date and one student loan servicer.
The benefit of a Direct Consolidation Loan is that it is
much easier to organize.
The other benefit is that it preserves access to the
aforementioned federal repayment programs as well as deferment and forbearance
options should you need more flexibility due to future financial hardship.
When you consolidate student loans, a Direct Consolidation
Loan will have an interest rate that is a weighted average interest rate of the
existing student loans. The resulting weighted average is rounded up to the
nearest 1/8%.
Therefore, it is possible that the final interest rate for a
Direct Consolidation Loan will be higher than the weighted average interest
rate of the borrower’s existing student loans.
In contrast to federal student loan consolidation, private
student loan consolidation does lower the interest rates on both private and federal
student loans.
Consolidate
Student Loans With A Private Lender
When a borrower wants to consolidate student loans with a
private student loan lender, the borrower receives a new student loan, which is
used to repay the previous federal and private student loans.
The new student loan has a lower interest rate, lower
monthly payment and single student loan servicer.
A borrower who decides to consolidate student loans with a
private lender will give up certain borrower protections such as access to federal
repayment programs, deferral and forbearance.
However, the lower interest rate and lower monthly payment
can more than justify the tradeoff and result in faster student loan repayment.
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