If you went to college, you likely had to take out student loans to pay for it. According to the Federal Reserve, more than half of young adults who went to college took out debt for their education.
While student loans can help you achieve your goals, they can be a serious burden once you graduate. If you’re struggling with your loans, private student loan consolidation can be a tool you can use to tackle your debt. Keep reading to find out how private student loan consolidation works and whether or not it’s right for you.
What is private student loan consolidation?
When it comes to managing your student loans, consolidation is an easy way to simplify your debt. You may have heard of federal loan consolidation, a process where your loan servicer combines your federal student loans into a Direct Consolidation Loan. Going forward, you’ll have just one loan instead of several, with just one monthly payment to remember.
However, the benefits of federal loan consolidation are limited. And, if you have private student loans, they’re ineligible for a Direct Consolidation Loan. Instead, consider private student loan consolidation, also known as student loan refinancing.
Through this process, you work with a private lender to take out a loan for the amount of your current federal and private student loans. Like federal loan consolidation, once you refinance, you’ll have one loan, one loan servicer, and one monthly payment. But, refinancing can be much more beneficial than federal consolidation if you’re trying to save money, pay off your debt ahead of schedule, or want a lower monthly payment.
Benefits of private student loan consolidation
Student loan refinancing offers several benefits over federal consolidation.
1. You could qualify for a lower interest rate
When you took out your student loans, you may have gotten stuck with a high interest rate. Over time, that rate could cost you hundreds or even thousands of dollars.
But with private student loan consolidation, you could qualify for a refinancing loan with a lower interest rate. With a lower rate, more of your payment goes toward the principal rather than interest, helping you get out of debt sooner.
2. You could save money
If you qualify for a lower interest rate, you could save a significant amount of money. For example, let’s say you had $30,000 in student loans with a 10-year repayment term at 8% interest. Over the course of your repayment, you’d pay $43,678. Interest charges would cost you over $13,000.
But if you refinanced your loans and qualified for a 10-year loan at just 5.5% interest, you’d repay a total of $39,069. With private student loan consolidation, you’d save over $4,600.
3. You could reduce your monthly payment
If you struggle to keep up with your monthly payments, private student loan consolidation can help. When you refinance your loans, you can choose a new repayment term. If you opt for a longer repayment term, you can dramatically reduce your monthly payment.
By extending your term, you’ll pay more in interest over the length of your loan. However, it may be worth it to get more breathing room in your budget while you build your career.
4. You can combine federal and private student loans
If you have both federal and private student loans, private student loan consolidation likely makes more sense than a Direct Consolidation Loans. Federal loan consolidation only allows you to combine federal loans. If you also have private student loans, they’ll remain separate from your federal ones.
With student loan refinancing, you can consolidate private and federal loans together. You’ll have just one loan servicer and one monthly due date, making it easier to manage your debt.
Drawbacks to private student loan refinancing
While private student loan consolidation can be a great way to manage your debt, there are some drawbacks you should keep in mind if you have federal student loans.
1. You’ll no longer qualify for income-driven repayment plans
With most federal student loans, you can sign up for an income-driven repayment (IDR) plan if you can’t afford your payments. With an IDR plan, your payments are capped at a percentage of your discretionary income and your repayment term extended, reducing your monthly payment. Once you refinance your loans, you’re ineligible for an IDR plan. With private student loan consolidation, you’re locked into a set monthly payment, even if your income changes.
2. You won’t be eligible for student loan forgiveness
If you have federal student loans and work for a qualifying non-profit organization or government agency, you may be eligible for Public Service Loan Forgiveness (PSLF). Under this program, the government forgives your loan balance after you make 10 years of payments on your loans while working in public service.
Once you complete the private student loan consolidation process, you no longer qualify for PSLF. There’s no way to discharge a refinanced loan, no matter what career path you choose.
3. You’ll lose access to federal deferment and forbearance options
With federal loans, you can place your loans into deferment or forbearance in some circumstances. For example, if you lose your job or have a medical emergency, you can temporarily postpone making payments on your loans.
Refinanced loans aren’t eligible for federal deferment or forbearance options. Some refinancing lenders do offer deferment and forbearance plans in case of financial hardship, but not all do so. If you are in a volatile or highly competitive field, make sure you keep that in mind before refinancing.
Consolidating your loans
Private student loan consolidation can be an excellent way to accelerate your debt repayment, save money, or even reduce your monthly payment. If you decide that student loan refinancing is right for you, use Purefy’s rate comparison tool to compare offers from multiple lenders and find the best rates.