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If you have student loans, chances are you’re dealing with multiple interest rates, multiple loan servicers and multiple monthly payments – a surefire recipe for multiple headaches. The idea of consolidating all your loans together sounds like a great way to simplify, but is that even possible when you have both private and federal loans? More importantly, is it advisable?
The short answer to the first question is yes, it is possible. But in order to decide whether it makes sense for your situation, there are some considerations to take into account. Here’s what you need to know:
Consolidating student loans simply means combining them together, but there’s a difference between consolidating through the government’s Direct Loan Consolidation Program and consolidating through a bank or alternative lender.
Okay, so we’ve established that certain lenders will allow you to consolidate your private and federal loans together. Now let’s talk about whether that option is right for you.
The interest rates on federal loans are all one-size-fits-all numbers determined by Congress, so everyone gets the same rate for the same type of loan regardless of their unique financial situations. This can be advantageous for some borrowers – for example, undergrads who have little-to-no credit history and income. But borrowers whose finances and credit improve after graduation may find they’re eligible for lower rates through a private lender. This is particularly the case for mature borrowers who take out higher-rate federal unsubsidized or PLUS loans for graduate, MBA or professional degree programs. (You can see how your credit standing affects your cost of debt over time using this calculator.)
Unfortunately, many borrowers who would qualify to refinance don’t even realize the option exists for federal loans – mostly because it only became available in the past few years. But as awareness grows, so does the number of borrowers who take advantage of refinancing. In fact, the majority of SoFi’s $1 billion in funded loans is made up of refinanced federal student loan debt. (Full disclosure: I work for SoFi.)
Before refinancing federal loans, it’s important to note that some of these loans have features that don’t transfer to private lenders through the refinancing process. There are three main examples:
Bottom line? If your priority is saving money, then refinancing both federal and private loans can be a great strategy. The benefits of consolidating – simplifying your life with one monthly bill and payment – are simply an added bonus.
This article is intended to provide useful information about personal finance, but it is not intended to provide legal, investment or tax advice.
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