Consolidating your student loans can be a smart financial move. It can help you lower your monthly payments and make it easier to manage your debt. There are two basic ways to consolidate your student loans. You can do so either through a private lender or the federal government. Only federal loans are eligible for federal consolidation.
In the case of a private student loan consolidation (often referred to as refinancing), a private lender, such as a bank, pays off your private or federal student loans. It then issues you a new loan at a new rate and with a new repayment schedule. Refinancing makes the most sense if you have high-interest private loans and can obtain a significantly lower rate or better terms with the new loan. However, with federal student loans, you have another option, which is to combine them into a new direct consolidation loan through the Federal Direct Loan Program.
Consolidating your federal student loans can offer several benefits. One major benefit of a federal loan consolidation is that it can combine multiple student loan payments into a single bill. There is no credit requirement, but there is also no chance of a lower interest rate. Consider federal student loan consolidation if you:
- Want to make a single payment each month.
- Need to switch repayment plans.
- Want to qualify for Public Service Loan Forgiveness (PSLF).
- Want to qualify for income-driven repayment plans.
- Want to get out of default.