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Consolidate student loans if you want to bundle multiple loans into one new loan. There are two forms of student loan consolidation: federal student loan consolidation and private loan refinancing.
When federal loans are consolidated, the Department of Education issues you a new loan for the amount of your old loans.
When private loans are consolidated, it’s in the form of refinancing student loans.
Borrowers with private loans, federal loans or both can benefit when they consolidate student loans by qualifying for a lower interest rate. It’s incredible the amount of money that can be saved with lower interest rates. Thousands of dollars can be saved over the life of the loan. Here is how:
Refinancing student loans can lower your monthly payment if you can qualify for a lower interest rate. Decreasing your monthly payment can give some breathing room to have a little extra money left over at the end of the month. Here is how:
Let’s say your loans total $40,000 with 8 years left to reapy and an interest rate of 7.00%, your monthly payment would be $545. If you qualified to refinance at a 3.50% rate and extended your term to 15 years, your payment would drop to $285. Refinancing, could free-up $285 that could be saved in a high-yield savings account.
Think about it. If you deposit that extra $285 a month in a high interest savings account like the one at CIT Bank that earns 2.10 APY over 15 years – you would have saved a total of $62,197.42 with $9,635 earned in interest.
Calculator Courtesy of SmartAsset.com based on 2.45% APY
Some federal student loans have variable interest rates. When variable rates fluctuate, your payments can increase. Fixed rate loans mean your rate will never change and payments stay the same for the length of your repayment. There are no prepayment penalties when you refinance student loans, meaning that if you decide to pay off your loan early there will not be any additional fees or charges to penalize you.
Significant benefits will be lost when borrowers consolidate federal student loans through refinancing. The new private loan will not likely offer the benefits of deferment, student loan forgiveness, or forbearance. If you refinance federal student loans, you’ll lose out on perks such as access to Income-Based Repayment plans and Public Service Loan Forgiveness programs. Any hardship programs offered will be at the discretion of the private lender.
Refinancing is based in part on credit history. People with a minimum 660 credit score and a record of a few on-time student loan payments are better suited for refinancing student loans. Of course you should have a stable job history too. Co-signers are encouraged if your credit or job history is shaky.
Federal loan consolidation doesn’t have a credit score requirement. You can potentially lower payments without having a good credit history. Consolidating your federal loans through the Department of Education is free. You’ll have one single payment and one large loan. The new loan terms will range from 10 to 30 years. Your repayment term will generally start within 60 days of when your consolidation loan is first disbursed.
The interest rate on a Direct Consolidation Loan is fixed, meaning it will stay the same for the length of your loan. To determine your rate when you have multiple federal student loans, the rate is the weighted average of the interest on your current loans rounded up to the nearest one-eighth of 1 percent. The repayment term is determined by the total amount you owe.
Get back on track and save your credit scores when you consolidate defaulted federal student loans. More than 1 in 10 federal student loan borrowers will default on their loans within three years. To consolidate defaulted student loans you must make three full, on-time, consecutive monthly payments on the defaulted loan. Then you can consolidate your loans into a new Direct Consolidation Loan. As long as you continue making timely payments your credit scores will recover.
Federal consolidation combines federal student loans into one new loan, and it lets you choose new repayment terms. But student loan consolidation does nothing to lower your interest rate unless you refinance student loans. With student loan refinancing you may be able to save $1000s of dollars.
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