How to Choose the Right Student Loan Consolidation

Step 1: Is Federal or private consolidation better for you?

The first big decision involves whether to pursue consolidation through the government, or a private lender. The U.S. Department of Education offers a Direct Consolidation Loan program, but it doesn’t lower your interest rate and only federal loans are eligible. Private lenders can consolidate both private and federal loans and potentially lower your interest rate, but you might lose eligibility for certain federal benefits. To help you decide which path is better for you, consider the following questions:

• What type of student loans do you have? Private loans cannot be consolidated through the federal government. If you have both private and federal loans and want to bundle them all into a single monthly bill, you should explore private refinancing options. (Note that you don’t have to include all of your loans when you consolidate. If it’s advantageous to refinance some but leave others intact, you can do that.

• Are you currently taking advantage of income-based repayment options? If your salary is low and you’re taking advantage of federal payment plans that cap your monthly bill to a percentage of your income, it might be best to stick with federal consolidation. However, if you’re able to make your monthly payments without any income-based adjustments, you should see if you can get a better rate with a private lender. It could save you thousands of dollars in interest over the life of your loan.

• Are you eligible for student loan forgiveness? People who work in public service jobs might be eligible for forgiveness of federal student loans after 10 years of consistent payments. If you’re a teacher, social worker, government employee, nurse, or employed by a nonprofit organization, you might be able to remain eligible for loan forgiveness by consolidating through the federal government. However, you’d lose progress toward the 10-year requirement and have to start over again. Refinancing with a private lender would disqualify you from federal loan forgiveness, but it might make sense if the savings from a lower interest rate are greater than the amount that might be forgiven. Weigh the tradeoffs before making a decision.

• What are your current interest rates? If you’re paying more than 4% interest, you might be paying too much. But the only way to lower your interest rate is by refinancing through a private lender. Federal consolidation doesn’t lower your interest rate, and might actually increase it. The interest on the consolidated loan would be a weighted average of the underlying rates, rounded up to the nearest eighth of a percent.

• How strong is your credit score? The federal government does not consider your credit score when you apply for consolidation. That can be helpful if you have a spotty credit history. But if your FICO score is 650 or higher, you might qualify for more attractive interest rates from a private lender.

Step 2: Do you want to change your payoff timetable?

The next decision is how long you want to take to pay back your loans. One of the benefits of consolidation – both federal and private – is that you can change the term length.

• Do you want to lower your monthly payments? Both federal and private consolidation enable you to lengthen you payback period, which will lower your monthly payments. You can choose to extend your 10-year loans into 15-, 20-, or even 30-year loans. However, if your interest rate remains the same, you will end up paying more over the life of the loan. By refinancing to a lower interest rate, you might be able to lower your payments without extending the term of the loan.

• Do you want to get out of debt faster? If you are able to pay a bit more each month, or if your credit history qualifies you for significantly lower interest rates, you might want to shorten your payback period. Choosing a shorter payoff time frame will save you money on interest.

• Do you want a custom time frame? If you are already 3 years into your 10-year repayment plan, and want to consolidate your loans with a 7-year payback period, the only way to do that is through a private lender. Federal consolidation is available in increments of 5 years, and options depend on the amount you owe.

• Our refinancing and consolidation calculators can help you see what your payments would be in different scenarios.

Step 3: Choose a lender

Your consolidation options will depend on which lender you choose. To make the best decision, it makes sense to get personalized quotes from different lenders:

Fortunately, it is a simple process that can be done online, usually in less than 15 minutes.

• If you’re consolidating through the federal government, there’s only one application to fill out. You’ll need to complete it in one sitting, so gather information about your existing loans before you start. Then go to studentloans.gov. Log in and select the “repayment and consolidation” tab.

• If you’re refinancing with a private lender, it’s a good idea to shop around for the best rates. Finding the right lender can be daunting, but we’ve done a lot of the research for you. At the National Student Loan Union, we regularly evaluate companies that offer student loan consolidation based on a comprehensive 23-point assessment. We highly recommend that you get at least three quotes before making a decision. The following lenders are a great place to start. They topped our ratings for 2017, based on their interest rates, transparency, product offerings, track records, ease of applying, and customer service.