When To Consolidate Your Student Loans (Via NerdWallet)
When to Consolidate Your Student Loans (Via NerdWallet)
Students and recent college graduates who have two or more federal and private student loans may be interested in ways to manage their debts, including loan consolidation. A sizable 17% of borrowers were either delinquent or in default on their student loans in 2014, according to the Federal Reserve.
It can be a challenge for recent grads to keep up with high payments or juggle several loan payments every month, each with its own amount and due date. Also, some loans may be candidates for refinancing due to their high or variable interest rates. For borrowers with several loans totaling more than $10,000, it’s worth investigating consolidation as a potential strategy for staying in good standing on your debts.
Consolidating your loans means taking out one new loan, with new terms, to pay off several smaller ones. Whether it’s a smart move depends in part on how unmanageable your current payments are relative to your income, as well as how much you’ll end up paying over the life of the loan if you consolidate.
Private student loans can’t be consolidated through federal programs, though some private lenders will combine federal and private loans into one private consolidation loan.
When applying for a private consolidation loan, lenders typically look at your credit score to determine your interest rate. If you’ve been working full-time for a few years and have been making loan payments on time, there’s a good chance your credit score may have improved significantly since your student days. If that’s the case, it’s probably worth checking with your financial institution to see if refinancing your loans is worth it.
Some credit unions offer more favorable rates or waive certain fees. For example, New York University Federal Credit Union offers variable- and fixed-rate consolidation loans for amounts up to $100,000, to NYU alumni with credit scores of 700 or higher. You don’t need to be a member of the credit union to apply, and borrowers with top credit pay no origination fees.
Most federal student loans, including Direct, Stafford, Direct Plus and Supplemental loans, can be consolidated at no cost to you. Consolidation can simplify and lower your payments, but it’s critical to first find out whether your existing federal loans have any benefits that you might not want to give up. Some, including Direct, FEEL and Perkins, for example, may allow for a portion of the debt to be wholly or partly canceled or forgiven if you work in a public service job, such as teaching in a public school.
Federal loans also offer favorable repayment alternatives for some borrowers who encounter financial hardships, such as longer repayment periods, payments capped at a set percentage of salary, or cancellation of the remaining debt after 25 years of repayments. Make sure the loan consolidation helps you manage in the short term, but doesn’t cost you a fortune in the long term.
You can apply for federal loan consolidation through StudentLoans.gov.
Consolidation can be a boon for struggling young adults. Remember, though, if you’re looking to trim your monthly payments, be sure you’re not paying too much down the road for the relief. And if you’re doing it to lower your interest rate, make sure the savings aren’t negated too much by fees.
Jeanne Lee, NerdWallet