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Consolidating Private vs. Federal Student Loans: What’s the Difference?

By on January 22, 2022 0

If you have student loans, you may have heard of loan consolidation before. This means combining multiple loans into one.

People do this because they can get a better interest rate on a single loan and also because it’s easier to track one monthly payment than several. Consolidation may seem like an attractive option when you think about these potential benefits.

However, you may not be aware that there is a difference between private student loan consolidation and federal loan consolidation. We’ll talk about it in this article.

Private vs. Federal Student Loans

Before we go into the details of the student loan debt consolidation, please make sure you understand the difference between federal and private student loan. Private student loans are provided by private loan companies. Federal Student Loans are issued by the US Department of Education.

A private student loan is not necessarily easier to secure than a federal loan. Federal student loans are often tempting because of the deferral options, low fixed interest rates, and income-based repayment.

Consolidation of Federal Student Loans

Let’s start by talking about federal student loan consolidation. If you have taken out more than one loan, it is sometimes possible to consolidate them with a direct consolidation loan. This type of loan is offered by the federal government. If you have private loans, this is not an option.

You can apply for one of these consolidated loans for free. You can easily do this online without any credit check. Once done, you can choose new repayment terms. For example, you can choose a long-term loan. This will lower your monthly payments, however, as a result, you will pay higher interest due to the longer term of the loan.

A federal student consolidation loan will increase the interest rate slightly. However, you can still go that route as you will now have lower monthly payments and one bill to pay each cycle.

Consolidation of private student loans

Now let’s move on to the consolidation of private student loans. If you have private student loans that you want to consolidate, you can deal with a private company instead of the federal government. Much like consolidating federal student loans, this option can mean lower monthly payments.

There are some differences, however. For example, a private company will take a look at how worthy a candidate you are based on your credit report. If you are considering consolidating federal student loans, you won’t have to go through that credit check.

Another significant difference is that some of the entities through which you can secure private student loan consolidation charge you a fee they call a commission. This is the loan percentage for converting an existing loan into a new, consolidated version.

This may seem like a reason not to consolidate private student loans if that start-up fee is too high. However, you can always research loan companies to see if they charge this fee or if you can find a lower one.

Consolidation often makes sense

Consolidation can be a logical move if you have multiple federal or private student loans. In each of the options, you can extend the loan period, giving yourself more time to pay it back. You can also switch from multiple bills to be paid each month to one.

Remember that if you intend to take advantage of the Federal Direct Consolidation Loan, you can apply for free and there will be no credit check. If you are trying to consolidate private loans with a non-federal loan entity, they will check your credit. You also need to be careful about possible start-up fees.

Anyone with student loans must weigh the pros and cons of private or federal consolidation. A close look at your finances will often tell if it’s a viable option.