You might have heard that you can’t consolidate private student loans. That’s one of many unfortunate misconceptions that keep people from getting a better deal on their monthly payments and interest rates. While private student loans can’t be consolidated through the federal government, there are several highly rated private lenders that can help you refinance them into a single monthly bill. And because private companies can be more selective about who they lend to, they often have significantly lower interest rates than the government offers.
To help clear up myths and misconceptions about private student loan consolidation, the National Student Loan Union has put together the following helpful guide. Read on to find out everything you need to know about consolidating private student loans.
Fact or fiction?
MYTH: The only way to consolidate student loans is through the federal government.
FACT- The federal government’s consolidation options are limited. The U.S. Department of Education has a program for consolidating federal student loans that enables borrowers to remain eligible for most income-based repayment plans and loan forgiveness programs. However, you cannot lower your interest rate or decrease overall costs that way, and private loans aren’t eligible. Alternatively, private lenders have a much broader array of options and can help you consolidate both private and federal loans into a single monthly payment.
MYTH: Consolidating student loans won’t really save you money
FACT - One of the benefits of private consolidation is the potential to get lower interest rates. That is not the case with the federal government’s Direct Consolidation Loan, which gives borrowers a weighted average of their existing rates. A recent review by Comet found that people who refinanced with private lenders saved an average of $259 a month and $19,231 over the life of the loan. Some borrowers saved more, and some less, depending on the size of their debt and their credit histories. But the average savings were substantial.
MYTH: Consolidating private loans is expensive
FACT - Reputable lenders generally don’t charge origination, disbursement, or prepayment fees when you consolidate student loans. Be wary if any lender wants you to pay fees up front in order to lower your interest rate or eliminate your debt altogether. Forbes warns that’s one of the biggest red flags that it’s a scam.
MYTH: Anyone can consolidate their student loans
FACT - Most lenders require applicants to have good credit, or a co-signer with good credit, to consolidate private student loans. Requirements vary depending on the lender, but most want applicants to have a FICO score of 650 or higher, a steady job, proof of graduation, a low debt-to-income ratio, and a track record of on-time payments.
MYTH: You have to owe a huge sum to consolidate
FACT - Most lenders require a minimum of $5,000 to refinance. The greater your balance is, the more you could save by consolidating. But you don’t have to owe a huge sum.
MYTH: You can’t consolidate student loans that you took out with a co-signer.
FACT - Consolidation is one way to release a co-signer from responsibility and transfer your student loans into your own name. When you pay off the old loans, the co-signer’s obligation ends. The new loan can be based on your own credit history and financial profile.The reverse is also true. If you didn’t have a co-signer before, but would benefit by adding a family member or spouse to your consolidation loan, you can do that when you refinance.
MYTH: You can’t consolidate student loans more than once.
FACT - In most cases, it doesn’t matter if you have previously consolidated some or all of your loans, as long as you’ve been making the payments on time. When you consolidate your student loans with a private bank, you pay off your old debts with a new loan that has new terms.
MYTH: Private lenders don’t have flexible repayment options
FACT - Although private lenders don’t have as many income-sensitive options as the federal government, many lenders do offer interest-only periods, deferment or forbearance programs.If you find yourself in a situation where you’re not making much money right now but anticipate a salary increase in the future as you grow in your career, it’s worth checking out these options first before locking yourself into a consolidation.
MYTH: You have to include all of your student loans
FACT - You can be selective and choose to consolidate your high-interest loans, but leave other loans with favorable terms intact. If you have federal loans that could be eligible for loan forgiveness after a period of time, it might be good to leave them out.
Is consolidating private student loans right for you?
The best way to find out if consolidating could save you money is to apply. Each inquiry generally takes less than 15 minutes. You can get an instant decision with no application fees, and there’s no need to worry about the effect on your credit score. The initial inquiry is considered a “soft pull,” and does not impact your score.
To get started, you’ll want to gather some information about the loans you’d like to consolidate. For each loan, try to gather the following:
- Lender/Servicer name
- Name on the loan account
- Account number
- Interest rate
- Current balance
- Monthly payment
- Total amount of all loans
We recommend that you apply with at least three different companies, and then compare rates and options. Here at Nitro, we regularly review lenders. There are many banks that specialize in student loan consolidation, but the following are the ones we consider the nation’s best, based on their interest rates, transparency, product offerings, ease of applying, and customer service.