Students will use a combination of federal and private student loans to help finance their educational expenses. A federal loan will be subsidized or unsubsidized, and may have maximum-income requirements. Private loans, which are not subsidized by the government, are issued through banks and other private lenders. Lending requirements tend to be much stricter, interest rates are variable, and terms will differ, so there is a completely different consolidation process for each of these types of loans.
There are three main reasons for consolidating your student loans: lowering your monthly payments, paying a fixed interest rate, and attempting to lower your overall interest rate. However, these benefits do not necessarily apply to both federal and private loans. This is just one more reason why these loans need to be consolidated separately.
People choose to consolidate their federal student loans so they can have lower monthly payments. Most federal student loans have a term of 10 years. By consolidating these loans, the term can often be extended out to 30 years as long as you meet a few minimum requirements. A longer term can cut your monthly payments by 20%, 30%, or even 50%.
If you are looking for a lower interest rate or a fixed interest rate, consolidating your federal loans will not necessarily be beneficial. After July 1, 2006, the federal government decided it would no longer charge variable interest rates on its student loans. This means that your loans already carry a fixed rate. However, consolidation will give you the chance to have just one fixed rate for your total federal loan portfolio. This new fixed rate cannot exceed 8.25%.
Parents and students are eligible to apply for federal student loan consolidation. The general eligibility requirement states that you can no longer be enrolled in the educational program or you must be attending the program less than part time. Many consolidation companies will require you to have at least $7,500 in federal student loans to extend your term and lower your monthly payment.
Banks are the primary lenders of private student loans. Lower monthly payments are just one of the benefits you receive when you consolidate private student loans. Banks assume all of the risk when lending this money, so they are more inclined to charge variable interest rates. This variable interest rate can wreak havoc on your finances since banks can change the interest monthly, annually, or at their discretion. By consolidating these loans, you can get one fixed interest rate for all of your private loans. This can make monthly financial planning much easier.
You may also get the chance to apply for a lower interest rate when you consolidate your private loans. When you first applied for these loans, your credit rating may not have been very high, or your credit history may not have even been established yet, so, the interest rates you were charged were pretty steep. If you are able to show that you have improved your credit history, you may be eligible for a lower interest rate.
You can work with student loan consolidation companies or banks to combine your private loans. Each organization will have different requirements you must meet in order to be eligible. Some may do a credit check, ask you to verify your monthly income, or check your residency status to make sure you have the financial means to pay back the loan and will not default. Unlike federal loan consolidations, organizations are able to charge a fee to consolidate private student loans. Understand thoroughly how the fee structure works and any penalties involved. Keep in mind that you may end up losing some of the discounts or rebates you had when the loans were separate.
It does not matter whether you decide to consolidate your federal or private student loans. You will only be able to consolidate loans that were taken out in your name. If your parents were the primary signers on private loans, they will need to initiate their own consolidation process. If you were the primary signer and your parents acted as co-signers on the loan, you will need to initiate the consolidation process.