With Covid-19 federal student loan relief scheduled to end on January 31, 2022,  you might be wondering what you can do to reduce your student loan payments.

One consideration is consolidating your student loans, which can potentially lower your interest rate and the amount you owe each month. But it’s important to know some of the potential downsides of consolidation as well, particularly if you’re consolidating with a private lender, which can come with higher costs and more restrictions than your current federal loan. 

Here’s a quick look at what loan consolidation entails, as well as some of the pros and cons.

Consolidation basics

When you consolidate your student loans, you lump all of your existing student loans into a single, new loan. While there are two main types of student loans—either federal or private—you can consolidate both. 

Here’s the tricky part though: You can potentially consolidate your federal loans into either a new federal loan, or a loan from a private lender. Not so with a private student loan, which you can only consolidate with another private lender, such as a bank, credit union, or online lender. 

To consolidate a federal student loan into another federal loan, you can use the U.S. Department of Education’s Federal Direct Consolidation Application portal. Remember though, when you initiate federal student loan consolidation, you’ll be locking in a new interest rate that’s the weighted average of the interest rates on your loans, says Mark Kantrowitz, a student loan expert and author of How to Appeal for More Financial Aid, based in Chicago, Illinois. This could be higher than the lowest rate you may be paying on your cheapest loan, so it won’t lower your rate.

To consolidate your federal loan into a private loan, or to consolidate another private student loan, you must go through a private lender or bank. The interest rate on a private refinance is based on the credit score of the borrower, and cosigner, if any, says Kantrowitz. 

When looking for a lender to refinance private or your private and federal loans, it’s probably wise to shop around, says Kantrowitz. “The lowest advertised rate is usually limited to a small percentage of borrowers,” he adds. You can also peruse rates and terms through online loan consolidation platforms like SoFi and LendKey. To receive a quote, you typically need to provide personal information, such as your name, address, and financials such as your income.

When applying for a loan, the lender will do a hard pull of your credit, which can affect your credit score

Note: There are typically no fees to consolidate student loans. Federal loans don’t charge fees to consolidate as a matter of law. Private lenders, while they could charge fees, typically don’t when you refinance, says Markowitz.  

Interest rates and terms may differ

Many federal student loans are subsidized, meaning the federal government pays the interest while you are in school and for a period of time after you graduate. Federal student loans also generally come with lower interest rates and more favorable terms, such as fixed interest rates, grace periods and income-sensitive repayment plans

  • The current interest rates for federal loans are 3.73% fixed interest for a direct subsidized or direct unsubsidized loan for undergraduates, and 5.28% fixed interest for a graduate direct unsubsidized loan.

Loans from a private lender are unsubsidized, and can have either fixed or variable rates, and you are responsible for all the interest on your loan.

  • The average interest rate as of August 2, 2021 on a 10-year fixed-rate loan is 3.43% from a private lender, and the average rate on a 5-year variable rate loan is 2.62% for people with credit scores of 720 or higher, according to one student loan refinancing site. With interest rates at all-time lows, you could benefit from the low-interest rate environment.

Consolidation pros

  • Lower interest rate. One advantage of lumping your student loans together is that it could potentially reduce your interest rate. Note this is the case only if you consolidate your loans through a private lender or bank. If you consolidate your federal loans by way of a Federal Direct Consolidation Loan, as your new rate is a blended one, you won’t be saving on interest. 
  • One payment. Instead of making several payments to different servicers and lenders each month, there’s only a single payment you have to worry about, potentially making it easier for you to keep track of what you owe. 
  • You might be able to switch to a fixed-interest rate. While all federal loans are fixed rate–meaning the interest rate stays the same for the life of the loan—that’s not the case for private loans, which can carry either a fixed or variable rate. One danger with a variable rate loan is that the rate you pay can go up if interest rates increase. With a fixed-rate loan, you can calculate exactly how much you’ll be paying in interest over the life of your loan. Plus, you’ll be paying the same amount each month. 
  • Resets deferment and forbearances. This only applies to federal consolidation loans, as private loans generally don’t allow for deferment or forbearance.  A federal consolidation loan will reset the three-year limit on deferments and forbearances, Kantrowitz says. “That’s because consolidation loan is a new loan, and is eligible for its own set of deferments and forbearances.” 

Consolidation cons

  • Giving up benefits of federal loans. If you’re consolidating your federal loans into a private one, Kantrowitz says that you’ll be giving up the benefits that come with federal loans. For instance, ​​income-driven repayment plans, death and disability discharges, longer deferments and forbearances, and numerous loan forgiveness options
  • More expensive in the long run. Consolidation usually increases the length of time you have to pay your loans. While your monthly payments might shrink, you could end up paying more over the life of your loan. 
  • Resets the clock on income-repayment plans and student loan forgiveness. Federal loan consolidation resets the clock on forgiveness on income-driven repayment plans, meaning you’ll be losing accumulated credits. “That’s because forgiveness is tied to the loan, not to the borrower, and a consolidation loan is a new loan,” says Kantrowitz. The same goes for your Public Service Loan Forgiveness (PSLF).

Consider all your options

Student loan consolidation can make sense if you’re concerned about being able to make your monthly loan payments, want to reduce your monthly payment, or shift to a fixed from a variable rate of interest. But it’s important to think carefully about the different types of consolidation loans available to you, as well as the trade-offs between federal and private loans. 

And if you’re considering a private lender, people with poor credit and unstable incomes may be less lucky. “Fixed interest rates on private refinances are at or near record lows,” Kantrowitz says.

“But, this will yield a lower interest rate than federal loans mainly if the borrower…has excellent credit, or if the borrower has federal loans from several years ago, when interest rates were higher.”

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