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Here's the Difference Between Federal and Private Student Loan Consolidation

Most graduates leave school with a number of different student loans, racked up throughout their years in college. Each of these loans likely comes with different terms, payments, servicers, and statements. The sheer amount of information and numbers can be difficult to track.

If you feel overwhelmed with managing your student loan debt, don’t panic. You do have options. One way to make student loans more manageable is through consolidation.

When you consolidate your debt, you combine all those loans into one. You do this by taking out a new loan for the amount of the balances of the existing loans, use thie newly borrowed money to repay all the older loans, and then focus on repaying your one new loan. This simplifies your financial situation and makes it easier to keep track of loan terms, payments, and other information you need to know. Other benefits of consolidation could include securing more favorable interest rates (if you also refinance) and lower monthly payments (by extending the repayment term).

Private and Federal Student Loan Consolidation: Know the Risks First

Before you choose to consolidate your loans, examine your situation carefully to determine if this is the best course of action. This isn’t a solution that works well for everyone (even if you do have several different loans to manage). Consolidation doesn’t always result in a lower interest rate, plus lower monthly payments usually means paying the loan over a longer period of time and spending more on interest.

You also need to know that this process is different for federal student loans and private loans, especially if you’re trying to manage each. Private lenders may be able to consolidate both private and federal loans, but you cannot roll private and federal loans into one new federal Direct Consolidation Loan.

And just because you can use private student loan consolidation to include your federal loans doesn’t mean it’s a good idea. Doing so eliminates any benefits or eligibility for repayment plans or loan forgiveness that you could have received from a federal program.

If you think you’ll need an income-driven repayment plan or want to pursue forgiveness options, it’s best not to mix federal and private loans.

Consolidating Federal Student Loans

When you choose to consolidate your federal student loans, the government will combine all your separate loans into a single new loan, known as a Direct Consolidation Loan.

Most federal student loans are eligible for consolidation, including subsidized and unsubsidized Federal Stafford Loans, Direct PLUS Loans, Supplemental Loans for Students (SLS), Federal Perkins Loans, Federal Nursing Loans, and Health Education Loans.

If you have a PLUS loan in the name of a parent, that loan cannot be transferred to the student during consolidation. You also cannot consolidate a defaulted loan until you make a repayment agreement with the loan’s servicer or unless you repay the new consolidated loan with one of the government’s eligible repayment plans.

Access to those repayment plans is one of the benefits of Direct Consolidation Loans for some borrowers. With the new loan, you could be eligible for income-driven repayment plans and possibly even forgiveness programs that you weren’t able to use prior to consolidating.

You can also enjoy the benefits offered by consolidating any debt, such as one, single payment and potentially lower monthly payments. However, federal consolidation doesn’t result in a better interest rate. Rather, the new rate is a weighted average of all the interest rates on your student loans, plus a small percentage on top.