Getting a college degree is an investment in your human capital that never goes away. It is also expensive. The average college student graduates with close to $30,000 of debt, a 20% increase since 2010. That number triples to $91,000 for graduate school students.
Up to 50% of borrowers take undergraduate and graduate education loans. People often have multiple federal and private loans to pay off. Despite these statistics, few college graduates are consolidating their student loans.
Loan consolidation refers to taking out one loan to pay off multiple student loans to have just one loan payment. There are private and public consolidation options, each with its prerequisites and benefits. While 85% of student loan borrowers fear consolidation, there are several reasons why student loan consolidation may be a good choice for you.
Private vs. Public Consolidation
Student loan consolidation is broken into two categories: Private consolidation or refinancing and public consolidation. Private student loan consolidation is when a private lender replaces one or multiple federal and private loans with one private loan. A public consolidation is when the federal government replaces multiple federal loans with one loan.
Private consolidation is best for someone looking to save money with a lower interest rate over the long term. In 2020, lower interest rates were the primary motivator in 76% of private consolidations.
Public consolidation loans simplify loan repayment for borrowers while extending the repayment term and lowering monthly student loan payments. This results in more interest payments over the life of the loan, but public consolidation loans also keep borrowers eligible for federal programs like income-driven repayment programs.
Public Student Loan Consolidation
Public student loan consolidation can only consolidate other federal loans like the discontinued Perkins Loans. Private loans can not be consolidated into a federal loan.
If your application is accepted, your previous loans’ interest rates combine to create a weighted average. This average is rounded to the nearest one-eighth of one percent to create a new fixed interest rate for the consolidated loan.
One of the main advantages of public loan consolidation is the transition of variable rate loans into a fixed rate loan. Other benefits of federal student loan consolidation include qualification for federal programs and additional repayment options.
Fixed rate loans with repayment options
The advantage of a fixed rate loan over variable rate loans is their predictability. The interest rate for a public consolidation loan will never change, which is good for the long-term repayment plans that often accompany student loans. Variable rate loans often result in lower interest rates but carry the risk of high-interest rates.
Student loans commonly come with 10-year repayment timelines. Federally consolidated loans come with either 10 or 30-year repayment plans. Longer repayment plans result in lower monthly payments, but they increase the amount you pay in interest and the overall cost of the loan.
Federal loan programs
Public consolidation loans maintain a person’s eligibility for federal loan programs. That includes public service loan forgiveness, which is for people working in public service jobs. Federally consolidated loans qualify if there is nationwide loan forgiveness.
This is the primary reason people are scared to consolidate their loan with a private company, despite the savings in interest payments they would get with a privately consolidated loan.
The problem with federal loan programs is that they limit career options and can cause large tax burdens for their recipients. Federal programs are also hard to qualify for. For instance, from October 2017 to June 2018, 28,000 people applied for public service loan forgiveness, but only 2% qualified to receive compensation.
Private Student Loan Consolidation
You can consolidate private and federal loans under a private consolidation loan. Banks and credit unions are popular lending institutions for student loan consolidation.
Private loan consolidation is preferable to public consolidation because your consolidated loan has lower interest rates rather than a weighted average interest rate. Also, you can refinance your loan multiple times with different lenders to ensure you pay the lowest interest rate possible.
The application process includes an evaluation of your financial standing with special attention paid to your credit score and debt-to-income ratio. A high credit score will earn you the lowest interest rates. Even those with low credit scores can use a cosigner to earn affordable monthly payments on their private consolidation loans.
Lower interest rate
The most popular reason for consolidating your student loans with a private loan is the potential for a lower interest rate. This is possible because private companies want your business and are willing to give you a better deal than you currently have in order to work with you. With market forces creating all-time low interest rates, now is a great time to refinance and consolidate your loans with a private company.
Refinance multiple times
Private companies’ interest rates are constantly changing because they partially depend on outside factors like the federal reserve’s interest rate. This creates financially beneficial opportunities for borrowers because you can consolidate and refinance your student loans multiple times when interest rates drop. Also, as your finances improve and your credit score rises, you can refinance your loan to earn lower interest rates.
Shop around for the best deal
The borrower’s ability to shop around for the best loan deal makes privately consolidated loans and refinanced loans into great money-saving opportunities. Since many private companies are lenders, you can apply for pre-approval and compare multiple types of loan offers.
Accumulating multiple loan offers also gives you the tools to negotiate with companies for the best loan possible. You should send competing loan offers to companies and ask if they can beat the interest rate or offer you other benefits like a grace period for interest accruement after you graduate.
Consolidating Loans With a Credit Union
While you have many options available to you for student loan consolidation, credit unions offer unique advantages over the other options. Credit unions, like T&I, are member-only, not-for-profit businesses. The members are the credit union owners, resulting in heightened care for their financial well-being.
At T&I Credit Union, this results in low interest rates for student loan refinancing and consolidating, with additional savings when you use automatic payments. We also take a more holistic approach to understanding your unique financial situation. While your credit score and income still matter, they are one part of your financial story that we want to hear as a part of your loan application.
T&I Credit Union is happy to work with you and a cosigner to get you the best available interest rate for your consolidated loan. A cosigner helps a borrower with low credit get low interest rates they otherwise would not qualify for. Plus, once you become a member of T&I Credit Union, you gain access to our other services like financial counseling and the money management tool.
Consolidate Your Student Loans Today
If you have multiple student loans with private companies or through the federal government’s Department of Education, you can consolidate them to simplify payments and save money. At T&I Credit Union, we want to relieve the stress of multiple student loan payments and save you money along the way with student loan consolidation and refinancing.
Contact us today for more information about our student loan services, and read our blog to learn more about personal finances.