The last post in this series is on consolidating private student loans. These programs provide graduates with the ability to combine multiple private (or alternative) student loans they received while in college into one loan. These loans can also be used to refinance one private student loan into better terms than they received while in school. Finally, some of these programs allow student combine federal and private loans into one private student loan consolidation.
When should you consider Consolidating Private Student Loans?
You may find when you graduate that your private student loans have a higher interest rate than other consumer loans you have. This is largely due to your lack of credit and income when you applied for the loan while in college. But in just a few years after graduation you may be in a very different financial situation. If you have been paying your loan and other debts in a timely manner your credit score is likely much improved. If this applies to you, you should explore consolidating private loans as a way to reduce your borrowing costs.
Another consideration is the type of interest rate that you have. Many private student loans had variable interest rates. This means that your loan’s rate will reset each year based on a certain market rate, usually LIBOR or Prime. Currently we are in a very low rate environment which is good news for borrowers. But, at some point interest rates will rise and your student loan payment will rise with it. Consolidating private student loans now with a fixed interest rate product now will allow you to lock in a low rate for the life of your loan, potentially saving you thousands of dollars.
How do you apply for a private consolidation loan?
While I can’t recommend specific lenders, I can tell you that a simple Google search will turn up several options for you to consider. You will find that you can choose from major national lenders, credit unions and regional banks. Make sure you do your research before applying. Some things you should consider when consolidating private loans.
- Interest Rate – can you qualify for a lower rate then you are currently paying?
- Annual Percentage Rate (APR) – even with a lower rate, a longer term could cost you more in repayment. The APR of the loan will help you see that more easily.
- Fixed or Variable Rate – It is unlikely that interest rates will drop significantly in coming years and they will most likely rise. The opportunity for you is to get a Fixed Rate Product to ensure you have today’s low rates until you loan is paid in full.
- Tax Benefits – student loan interest can be deducted on your tax return in many cases. Make sure the loan you choose is still considered an education loan.
Consolidating Private Student Loans and Federal Student Loans together
There are some lenders today that will offer you the opportunity to consolidate your federal and private student loans into one loan. There are many things for you to consider before pursuing this option. In some cases it could make sense, but in other cases you may lose valuable programs that are only offered for federal student loans.
Benefits of Consolidating Private Student Loans with Federal Student Loans
- Federal student loans taken out before July 1, 2013 had fixed interest rates that in some cases are higher than market rates. If you have excellent credit you may be able to consolidate those loans at a rate below your fixed federal student loan rate.
- You will have only one lender to deal with for the remainder of your repayment
Concerns with Consolidating Private Student Loans with Federal Student Loans
- As noted in a previous post, some federal student loans are eligible for loan forgiveness. This would be lost when consolidating private student loans and federal student loans.
- Student loan repayment relief programs like Income Based Repayment and Pay As You Earn only apply to federal student loans.
- Federal student loans have forgiveness provisions in the unfortunate case of the borrower dying or becoming permanently disabled. This may be offered with private student consolidation loans as well, make sure you check with your lender.
This completes my series on student loan consolidation. If you are just entering repayment or are overwhelmed with your student loan payments you should explore the options of consolidation. You can find more information in the earlier posts in the series which you can find here and here.
Good luck with repayment of your student loans! If you have questions, please leave them in the comments below.