You may think that your time at college was a priceless experience, but the people who loaned you money are all too willing to tell you exactly what that post-secondary education is worth. Dealing with multiple loans from either a private bank or from the government (or both) can be overwhelming. Consolidated student loans – or making those multiple loans become one single loan – can not only be more convenient, but it can also save you money. But whether you’re trying to improve your credit score, get a lower monthly payment, or just consolidate into one single payment, there are some things you should know before considering loan consolidation.
1. Federal and Private Don’t Mix
Because of the low interest rates on federal student loans, they generally can’t be consolidated with your private student loans. You can consolidate multiple federal loans into one loan and multiple private loans into a new single loan, for a total of two new loans. Keep in mind with federal loans that once consolidated, the original loans no longer exist. You will lose the borrower benefits offered by the government, such as rate discounts, principal rebates and cancellation benefits.
2. One New Monthly Payment
When you go to a bank or a private lender for a consolidation loan, that new lender pays off all of your outstanding loans. One new loan is then created by the lender for the amount they paid to close out the old loans, plus interest. Since a brand new loan is created, this means that you can negotiate the interest rate and the length of the loan. Often consolidated student loans offer a longer period of time over which to pay the loan back, which would reduce your monthly payment, but would of course increase the total amount you’re paying over the life of the loan.
Private lenders are much more willing to consolidate student loans than they have been in the past. They’re also offering consolidation loans with variable rates as low as 4.25%. Variable rates are beneficial because they generally have a lower starting rate than fixed rates. However, keep in mind that a variable rate will fluctuate– so your monthly payments may rise and fall over time.
3. What’s Your Number?
Your FICO number, that is. Your credit score will affect both your ability to get a consolidated student loan and the interest rates you’ll be able to secure. If you’ve been delinquent with paying your existing loans a new lender will see you as risky. However, if your FICO score has improved by 50 to 100 points, you’re a great candidate for a better interest rate on a consolidated student loan. If your FICO score is low, start making regular, on-time payments to your credit cards, student loans and utilities. In a year or two, your score should improve and consolidation may be more viable.
4. My Loan, Your Loan
When you first signed for your student loan, you may have needed a co-signor (probably a family member) who had better credit than you. When you apply for a consolidation loan, which is a brand new loan, you may still need a co-signor if your credit score hasn’t improved. However, some private institutions are removing co-signors from consolidated student loans after one-year of perfect re-payment.
If you managed to build your credit score while at college, you may be able to get the consolidated student loan on your own. Having the loan in your name only will further help you strengthen your credit.
5. Extra! Extra!
Always ask about any additional fees that you may incur by having a consolidated student loan. Will you have to pay a fee for closing your other loans early? Some lenders have penalties for pre-payment. A pre-payment is a monthly payment that exceeds the amount due – regular pre-payments can significantly reduce the principal of your loan over time, which means less money for the lender.
There are many factors to consider before consolidating your loans. You’ll want to do the math and see exactly what your savings will be, including any fees. But, if you’re having some difficulty paying all your loans on time, consolidation might be the best way to save your credit score – lowering your monthly payment and making re-payment more manageable. Remember, consistent on-time payments are the best way to dig yourself out of student debt and build your credit.