Loan consolidation is the process of replacing one or more loans with a different loan. If you have at least one student loan from a private lender, such as a bank or credit union, you can consolidate this loan with any other private student loan. However, you cannot consolidate private and federal loans together, nor can you turn a private student loan into a federal student loan.
Benefits of Consolidation
Borrowers generally seek at least one of three major benefits of consolidating student loans. The first goal is to reduce the number of separate monthly payments by consolidating multiple loans into just one new loan. The second goal is to pay less in interest by getting a consolidation loan with an older interest rate than the original loan. The last major goal is to lower the monthly payment with a lower interest rate, longer repayment term or both.
Prepare to Consolidate
Before applying for a consolidation loan, gather information to help you understand what kind of loan you need. Write down the outstanding balance and interest rate for each of your current private student loans. Add up the outstanding balances to find out how much to borrow with your consolidation loan. Because your interest rate on the loan will be based partially on your credit score, boost your score by getting current on all of your debt obligations and paying down credit card debt, if possible. If you know somebody with a good credit score, ask that person to co-sign on the loan with you to help you get a better interest rate. However, make sure that individual is willing to take joint responsibility with you for the repayment of the loan.
Consolidate
Fill out an application for a private consolidation loan with a bank or credit union. If you like one of your current lenders for your student loan, ask about its consolidation programs. Another option, if you own a home, is to consolidate student loans by taking out a home equity loan. Because this type of loan is secured by the home, it will likely have a lower interest rate than a traditional consolidation loan. However, you are risking your home because you could face foreclosure if you miss payments. Talk to a broker to find out if a home equity loan is a wise option for you. Regardless of the route you choose, continue making payments on your current student loans until the lender sends confirmation that your loan has been paid off by the consolidation loan.
Warning
Consolidating private student loans into a new loan with a longer repayment term might increase the overall cost of repaying your debt. Although the monthly payments on the consolidation loan might be lower than the sum of the monthly payments on the original loans, you could be making these payments for a few years longer than your original schedule. For the most savings, choose the highest monthly payment you can reasonably afford or get a loan with no prepayment penalty and make extra payments when you can afford them.
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