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Student Loan Consolidation: When to Combine Federal and Private Loans Through Refinancing

One of the biggest student loan myths out there is that borrowers can’t consolidate federal and private student loans into one loan.  It’s understandable how this misconception came to exist, since this wasn’t an option for many years.  But now that the choice is available, it’s important for borrowers to understand whether it’s right for them – especially when there’s the potential for significant cost savings on the line.

While it’s not possible to use the federal Direct loan consolidation program to combine your federal and private student loans, it is possible to consolidate federal and private student loans  with some private lenders.  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 interest rate, which means that in addition to consolidating you are also refinancing student loans .

Why would you want to do this?  In addition to the advantages of consolidation (like having one, simplified monthly payment), you may also qualify for a lower interest rate.  Refinancing student loans at a lower rate can

mean big benefits, like lowering monthly payments, reducing the time it takes to pay off your debt, and cutting down on the total interest you pay over time.

Now that you know you can combine federal and private loans through the student loan refinancing process, the next question is whether you should do it.  Here are two important questions to ask yourself before making a decision:

1.  Do your federal student loans have high interest rates?

Some people assume that federal loans always offer the best rate available, but this simply 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 why many borrowers look to refinance high interest rate unsubsidized Direct loans and Graduate PLUS loans .

But how important is interest rate, really?  Let’s compare a 10-year term, $80,000 loan at 7.21% (the fixed rate on federal Grad PLUS loans issued between July 2014 and July 2015) and 5.88% (the average interest rate for SoFi refinance borrowers as of 12/31/14).*

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