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



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

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

What you may not realize, however, is that there is a difference between private student loan consolidation and federal loans. We will talk about it in this article.

Private vs Federal Student Loans

Before going into student loan details debt consolidation, let’s make sure we understand the difference between a federal student loan and a private student loan. Private student loans are issued by private loan companies. Federal student loans are issued by the US Department of Education.

A private student loan is not necessarily easier to obtain than a federal loan. Federal student loans are often attractive due to deferral options, low fixed interest rates, and income-contingent repayment.

Federal Student Loan Consolidation

Let’s start by talking about federal student loan consolidation. If you have subscribed to several, grouping them together via a Direct Consolidation Credit is sometimes possible. The federal government offers this type of loan. If you have private loans, this is not an option.

You can apply for any of these consolidated loans for free. You can easily do this online without a credit check. When you do, you can choose new repayment terms. For example, you can choose a longer term loan. This will lower your monthly payments, but you’ll end up paying more interest due to the longer term of the loan.

A federal student loan consolidation loan will cause your interest rate to increase slightly. However, you can still go this route because you will now have lower monthly payments and only one bill to pay each cycle.

Consolidation of private student loans

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

There are, however, some differences. For example, a private company will review how worthy a candidate you are based on your credit report. If you are considering a federal student loan consolidation, you will not have to go through this credit check.

The other crucial difference is that some entities through which you can obtain private student loan consolidation will charge you something they call an origination fee. It is a percentage of the loan for the treatment of the existing loan in its new consolidated version.

You might feel like this is a reason not to consolidate your private student loans if these origination fees are too high. However, you can always research lending companies to see if they don’t charge this fee or if you can find a cheaper one.

Consolidation often makes sense

Consolidation may be a logical decision if you have multiple federal or private student loans. With either option, you can extend the term of the loan, giving you more time to pay it back. You can also go from having several bills to pay each month to just one.

Remember that if you opt for a direct federal consolidation loan, you can apply for it for free and there will be no credit check. If you try to consolidate private loans with a non-federal lending entity, they will check your credit. You will also have to pay attention to any assembly costs.

Everyone with student loans must weigh the pros and cons of private or federal consolidation. A careful review of your finances will often reveal if this is a prudent option.

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