Loan consolidation is a process used by individuals who have a hard time keeping track of monthly loan payments and are looking for a lower interest rate. It combines multiple loans into one larger loan to reduce the number of payments you’re responsible for every month.
The Student Loan Consolidation Program in the U.S. uses this strategy specifically to combine federal student loans, which can be overwhelming on their own.Similar consolidation methods can be used for privately funded student loans, as well.
Consolidating Federal Student Loans
Taking out a consolidated loan is always free. You can consolidate federal student loans at any point after you graduate, regardless of whether you are in the grace period.
You can combine any amount of student loan debt, and there is no minimum or maximum amount.A consolidated student loan may reduce your monthly payments and extend your borrowing time, creating some breathing room for repayment.
There is a series of steps to consolidate your federal student loans. The process typically takes 60 to 90 days.
First, complete an application by:
- Calling (800)557-7392 or
- Visiting the Federal Direct Consolidation Loans Information Center online.
The Department of Education (DOE) will notify you if it needs further information to process your application.
The DOE will then complete back-end procedures. It willcontact your lenders to verify:
- That your loans are eligible for consolidation and
- The accounts’ current balances.
If you apply for an Income Contingent Repayment (ICR) plan, the DOE will contact the Internal Revenue Service (IRS). An ICR plan’s repayment terms change to accommodate your budget and rely on income information supplied by the IRS.
After all the necessary factsare documented and approved, you’ll receive a loan statement with information about the loans being consolidated.
You’ll have 15 days to review the statement and make necessary corrections. If you don’t respond within 15 days, the DOE will go ahead with the consolidation process.
At this point, the DOE will pay off all your federal student loans and create a new loan. You’ll receive a confirmation letter and repayment information after the consolidation process is complete.
You will be responsible for repaying the same loan amount, but you’ll make one monthly payment to a new lender instead of multiple monthly payments to all of your old lenders.
Consolidating Private Student Loans
Private student loans, like personal loans, are distributed by private lenders like banks and college foundations. They are not ideal because they typically come with higher interest rates and less favorable repayment options than federal loans.
Because these loans are granted by private lenders, the consolidation process is the same as it is for any personal loan. The best way to go about this is to work with a debt consolidation company. The company will consolidate your loan for you, paying off your creditors to leave you with a single, simpler loan.
The new loan often comes with a lower interest rate and better repayment terms.