One of the biggest student loan myths out there is that
borrowers can’t consolidate federal student loans and private student loans
into one loan. It’s understandable why
people think that, since this wasn’t an option for many years. But now that the choice is available, it’s
important to understand whether federal and private loan consolidation is right
for you – especially when there’s the potential for significant cost savings on
the line.
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Can I Consolidate Private and Federal Student Loans?
While it’s not possible to use the federal Direct loan
consolidation program to combine your federal student loans with private loans,
it is possible to combine private and federal student loans by refinancing them
with a private lender. Through this
process, you actually apply for a new loan (which is used to pay off your
original loans) and you’re given a new—ideally lower—interest rate.
Why would you want to do this? In addition to the advantages of loan
consolidation (like having one, simplified monthly payment), refinancing
student loans at a lower interest rate can mean big benefits, like lowering
monthly payments or reducing the time it takes to pay off your debt, and
cutting down on the total interest you pay over time.
When to Consolidate Federal Student Loans & Private
Loans
Before you refinance federal student loans, there are a
couple of things to think about. Here’s
an easy decision tree to help you understand whether refinancing federal loans
is right for you:
Federal Student Loan Interest Rates, Revealed
Some people assume that federal loans always offer the best
rates, but this just isn’t true.
Depending on loan type and disbursement date, your federal
student loan rate could range from about 3% to 8%. With prevailing interest rates at historic
lows, some private lenders offer rates that are
significantly better than a high-rate federal loan. This is particularly true for grad school
borrowers who use unsubsidized Direct loans and Graduate PLUS loans to finance
their education.
Understanding Federal Student Loan Benefits
Some federal student loans offer benefits and protections
that do not transfer to private lenders.
This is often the reason that people cite when they say you shouldn’t
combine federal and private loans. But
before you dismiss the idea of refinancing, you should first take a look to see
if any of these benefits apply to you.
For example, under the Public Service Loan Forgiveness
Program (PSLFP), your Direct Loan balance may be eligible for forgiveness after
120 payments if you’ve worked in the public sector that entire time. Similarly, the Teacher Loan Forgiveness
Program is available for teachers who work in schools that serve low-income
families full-time for five consecutive years. These are clearly great programs
for people who choose careers in public service or education, but if that’s not
you, they won’t do you any good.
There are also a number of federal loan repayment plans that
can ease the burden for borrowers facing tough economic times. For example, the
government’s Pay As You Earn (PAYE) and Income-Based Repayment (IBR) programs
allow borrowers to make reduced monthly payments based on financial
hardship. But if your income is over a
certain threshold, you won’t benefit from these programs. And if you do qualify, but you’re at the high
end of the spectrum, your slightly lowered payments may come at a
disproportionate price in the form of accumulating interest.
It’s important to note that some private lenders offer their
own benefits and protections. At SoFi,
for example, if you lose your job, we’ll not only pause your payments, we’ll
help you find a new one.
Federal Loan Refinance Recap
Combining federal study loan and private loans
through the refinancing process won’t make sense for every borrower, but it provides
great benefits for some. Now that you
know it’s an option and you understand how it works, you can better assess
whether it’s right for you.
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