One of the biggest myths about student loans is that borrowers cannot consolidate federal student loans and private student loans into one refinancing loan. It is understandable why people think so because it was not possible for many years. Can you consolidate private and federal student loans together?
Should I consolidate student loans?
The Direct Consolidation Loan Program is the right choice if your goal is to simplify the repayment process for federal loans and leave open options for many repayment plans available for federal loans. You will not receive lower interest rates. In fact, it may increase slightly. The rate is set on the basis of the weighted average interest on consolidated loans rounded up to the nearest one-eighth of 1%.
If you use private lenders to consolidate student loans, there is a chance that you will get a better interest rate and perhaps lower monthly payments. A small chance, but still a chance. This is due to the fact that federal loan rates are so low – a fixed rate of 4.45% for students, 6% for graduates in 2017-2018 – that it is difficult for private lenders to beat rates and earn.
Advantages of direct loan consolidation
There are many good reasons to consolidate under a direct loan consolidation program, of which at least ensures the maintenance of one of the income-based plans, such as REPAYE (repayment as earning), PAYE (repayment as earning), IBR (repayment based on income) and ICR (repayment based on income).
Here are more benefits of the direct loan consolidation program:
- One payment. Consolidation means combining all federal loans into one.
- Avoid defaults. Consolidating loans will allow you to change the terms and reduce your monthly payment.
- Fixed interest rate. If you have a lot of loans, you probably have many different interest rates.
- Lower payments. The consolidation offers various repayment plans, most of which extend the terms of the loan from 10 years to 15, 20 or even 30 years.
- Many repayment plans. A federal consolidated loan qualifies for many repayment plans, and borrowers can choose the plan that best suits their situation.
- Increased options for deferment / forbearance. Because the direct consolidation loan is a new loan, it restarts the deferral and forgiveness clock for up to three years.
- No minimum or maximum. There is no minimum amount that is eligible or maximum amount that can be consolidated.
- Credit Protection. The consistent repayment of student loans has a positive effect on your creditworthiness.
- Automatic debit. Set up automatic debit from your bank account to pay bills monthly and you’re ready. Just make sure your account is well funded every month.
- Loan discount. Some banks offer interest rate discounts if you set up automatic debit. Few offered a 1% interest rebate after 36 months of payments on time, provided that these payments were continued.