Student Loan Consolidation Options

If you have student loan debt, then you have plenty of student loan consolidation options. These consolidation options each have their own pros and cons, but depending on your current situation, one will likely shine better than another. A student loan consolidation should decrease the length of time it takes to pay off debt, reduce your interest rates and fees, and provide for lower monthly payments to increase your end of the month cash flow.

Federal loan consolidation
Direct Loans, the entity which issues loans from the federal government’s Department of Education funding, offers consolidation options for those with Stafford loan debt. Under the federal program, all or some of your student loan balances can be rolled into a new debt, one which might have lower monthly payments, interest, and better payment terms.

Unfortunately, you cannot roll private lender debt balances into the federal student loan consolidation program. Thus, any federal loan consolidation has to be of Stafford loan balances. Also, consolidating a federal student loan may not always be the best option. Unsubsidized student loan balances may earn a higher rate of interest if consolidated by the federal consolidation program. However, if your primary concern is your monthly payment, you’ll be able to extend the original 10 year loans into 20-30 year debts. Doing so increases the length of time to repay and interest paid, but lowers your monthly payment.

Private Loan Consolidation
Private student loan consolidation options allow you to roll private and public (Stafford loans) into one single debt to a new private lender. In a private student loan consolidation, the company writes a check to each of your current creditors, which pays off the current accounts. The balances are then added to your new consolidation loan, which is then the only loan you have to pay.

In a private loan consolidation the primary goal should be to decrease your interest rates and monthly payments, as well as the time it takes to repay the loan if possible. By consolidating your debts, you’ll likely qualify for a lower rate, which may allow you to reduce your repayment term while keeping your monthly payments about the same as before the consolidation.

Ideally, a private loan consolidation should be done with a fixed interest rate, which can remove all of the risk of rising interest rates while you pay down your loan. Older Stafford loans, as well as current private loans, are variable interest rate debts, which may force you to make higher monthly payments when interest rates are rising.

Less Traditional Consolidation Options
Finally, there are other student loan consolidation options which are untypical, but equally powerful in reducing your debt loads and improving your financial situation.

These two options are:

  • Home equity loan – If you have been out of school for a period long enough to accumulate home equity, then a home equity loan is a great way to consolidate your student loan debts while still getting a tax credit for your student loan interest. A home equity loan will allow you to borrow for 10-30 years the amount you need to pay off your student debts, and the balance is rolled into a new mortgage payment. Inexpensive, secured, and easy to find, a home equity loan is a great way to retain all the tax benefits of student loan debt while keeping your rates low.
  • Balance Transfers – If you’re close to your final student loan payment, consider using a balance transfer option on a credit card to repay the debt. By transferring your balances, you can lock in rates as low as 0% per year for promotional transfers, and completely close out your current student loan. This method does require responsibility, as if you do not pay off your student loan debt before the balance transfer period ends then you will have to pay credit card interest rates of 10-20% per year.