Everything you need to Know about Loan Consolidation and Student Loan Forgiveness

In the first quarter of 2020, Americans owed over $1.6 trillion in student loans. This figure was about $500 billion in 2007. It might be easy to think that the escalating debt has to do with a higher number of students in colleges, but this is not the case. There were 18.25 million students in both private and public colleges in 2007, and there are 19.75 in 2020 (Source).     

What the numbers above show is that more Americans are turning to debt to finance their education. With the unemployment brought about by the Coronavirus (Covid-19), more people are likely to turn to student loans to remain in college. Many more may default.  

About 10% of Americans default on their student loans. But is there a way to ensure that you don’t become part of this 10%? Fortunately, the answer is yes, and you too may qualify for student loan consolidation and student loan forgiveness.

We took some time to look at the most frequently asked questions about student loan consolidation and student loan forgiveness.

Student Loan Consolidation

Student loan consolidation is the process by which you combine all your student loans into one new loan with a fixed interest rate. This is usually the weighted average (the interest rate of the biggest amount has a bigger impact on the average) of the interest rates of all the loans you have combined. This means that you will now have only one payment to deal with once your loans are consolidated.  

Is it wise to consolidate your student loans?

This will depend on your situation. For instance, some loans come with conditions that have to be given up when the loan is consolidated. Also, consolidation could result in an extended period of indebtedness. Thus, it is crucial to consider your situation before you decide on consolidating your student loans.

Once you consolidate your loans, you can’t remove them from the consolidation plan. They will be paid off and immediately cease to be individual loans as soon as you combine them into a new single loan. 

However, you can choose the loans you want to consolidate and leave out the ones you don’t want to include (Source). 

Is student loan consolidation the same as refinancing?

Student loan consolidation is similar to debt refinancing because they both involve combining all (or some) of your loans into one monthly payment. However, there are some differences:

  • Refinancing primarily involves private loans and can only be undertaken through private lending institutions such as banks, credit unions, and other online lenders.
  • With refinancing, you can negotiate a fixed or variable interest rate that is often lower than what you paid for each of your loans. To determine your interest rate, private lenders often consider other factors like your credit score and having a co-signer. 
  • Since only private lenders provide refinancing, they allow consolidation of both private and federal loans.

If you want to include federal loans into your refinancing plan, you may lose the repayment and forgiveness options they offer. 

What should you look out for when you consolidate a student loan?

Federal loans generally come with benefits. For instance, federal loans in 2020 have a fixed interest rate of 5%. This means that this interest rate will not change during the lifetime of the loan. Also, such federal loans could come with breaks during times when you experience hardships. If you consolidate your loans with a private lender, you may lose these benefits.

However, you may decide to consolidate your loans within the federal student loan system, but this will not save you any money because the interest rates are usually fixed. The main benefit you would get is that your loans are combined into one repayment, which could extend your loan repayment period, a situation that could lead you to pay more in the long run. 

If you choose to consolidate your loans with a private lender, ensure that you read the fine print and understand all the terms of the loan. Some private lenders may offer flexible repayment options, such as interest-only repayments or interest rate reductions, but defaulting on your payments can attract expensive fees.

Finally, check the benefits. The idea of consolidating your loans would usually be based on making things easier for you.

Will consolidating student loans hurt your credit score?

Yes, it is possible that consolidating your student loans can hurt your credit score, but it could also benefit it, depending on your situation. If you already had a good credit score, consolidating your student loan will be seen as opening a new debt account. This brings down the period of your credit accounts and your credit score.

If you have been struggling to pay off your debt, or think that you may have challenges in the future, consolidating your student loans may help you better manage your payments. A lower monthly payment could help you make more timely payments, or additional payments, to reduce the principal amount. Such activities on your credit report can improve your overall score in the long run. 

Are there any costs to consolidating student loans?

Loan consolidations typically mean you get an extended repayment period to pay off your loans. You may save some money from reduced monthly repayments. However, you will pay more interest in the long run because of the extended time. 

What kind of student loans can be consolidated?

Student loans that may be eligible for consolidation include:

Can private loans and federal state loans be combined for consolidation?

Federal consolidation programs don’t allow combining of private student loans with federal student loans. If you have both private and federal loans, you’d have to consolidate or refinance them through a private lender. 

Can defaulters consolidate student loans?

Defaulters can consolidate their student loans. Usually, you will need to agree to a process of loan rehabilitation. This involves contacting your loan holder and agreeing to make solid agreements to repay them by, say, using income-based repayment plans

How does loan consolidation affect the interest rates?

If the interest rate you pay on your consolidated loans is the average of the interest you are paying on all your different loans, then consolidation will not have any effect on your new interest rate.

While the consolidated interest rate will be lower than the rate on your highest loan, it will also be higher than the rate on your lowest loan. However, an extension of the period means that you hold the debt for longer, and the longer you have liability, the more interest you will pay. 

When should student loans be consolidated?

You are generally eligible for consolidation after your graduation. You can also apply for consolidation while involved in studies that are considered lower than half-time enrollment.  

When do payments for a consolidated loan start?

Usually, your loan provider will determine when you will start your repayment. For instance, the Direct Consolidation Loan requires you to begin repayment in 60 days (Source).

How can you apply for student loan consolidation?

To start the application to consolidate your federal loans, log in to the studentaid.gov website. The website will provide you with a demo where you get an idea of what the process involves.  

To consolidate your student loan with a private loan provider, you will have to contact the loan provider and inform them that you are considering student loan consolidation.

What are the disadvantages of student loan consolidation?

Student loan consolidation may be appealing when you want to retain a little more cash at the end of the month or when you are in dire straits. However, before jumping onto the loan consolidating programs, be clear about what you are going into because loan consolidation may have some disadvantages: 

  • By extending your repayment period, you’ll pay more interest in the long run.
  • The rounded interest rate calculation might work against you if some of your loans had higher rates. The weighted average may be a little higher than the simple average.
  • Private loans can’t be part of any federal consolidation programs. Some private lenders allow consolidation of federal loans, but their consolidation programs may have higher interest rates.
  • Loan consolidations essentially reset the clock on your loans. You may lose some time-based benefits, such as grace periods.
  • You are stuck with the fixed interest rates at the time of calculation. There’s no recourse, even when the general interest rates go down.

Student Loan Forgiveness

Your student loan can be forgiven through the process of Student Loan Forgiveness. The initiative is a result of the Student Loan Forgiveness Act of 2012. It can free you from having to pay part or all your federal education loan debt. 

Student loan forgiveness programs only apply to direct federal education loans.

How can you earn student loan forgiveness?

You can earn student loan forgiveness in the following ways:

  • Working in the public service (an example is the Teacher Loan Forgiveness for Direct Student Loans).
  • Making your payments through an income-contingent plan. This plan compares your income to your expenses and sets your payment at a level you can afford. Your payment could even be $0 a month (Source).  
  • A discharge due to circumstances beyond your control, such as an injury or health condition that leaves you unable to work   

What is public service loan forgiveness (PSLF)?

PSLF is a federal program that can wipe off the remaining student loan debt balance on your direct federal loans after making 120 qualifying monthly repayments within an eligible payment plan. You must also be working on a full-time basis for a qualifying employer, typically a government or non-profit organization (Source). 

Can consolidated loans be forgiven?

According to the Student Loan Forgiveness Act of 2012, federal consolidation loans are eligible for forgiveness. They also qualify for other federal protections, such as forbearances, deferments, and income-driven repayment plans. 

However, when federal loans are consolidated under a private lender, they are no longer eligible for forgiveness under federal programs.  

Why are so many student loan forgiveness applications rejected?

Less than 1% of people applying for student loan forgiveness are successful (Source). Here are five top reasons:

  • Applying for student loan forgiveness for private student loans.
  • Applying for forgiveness of Federal Family Education Loans (FFEL). These loans were typically regarded as federal loans, but since private lending institutions funded them, they don’t qualify for public loan forgiveness.
  • You don’t work for a public service employer.
  • You gave incorrect or misleading information. 
  • You haven’t met the minimum 120 qualifying repayments.

What options do you have if your student loan forgiveness application is rejected? 

The first thing to do if your student loan application is rejected is to determine the reason. You may try again if you made a mistake in the initial application and applied to a program under which you do not qualify. 

For instance, if your application was rejected because you were in the wrong payment plan, such as applying to the extended or graduated payment plan when you should have applied for the income-driven program, then you can make another application (Source). 

If the student loan forgiveness route seems impossible, then you can resort to consolidating your loan and paying a lower amount each month. It may also be possible that you are living beyond your means. This implies that you may need to adjust your expenses to see whether you can improve your financial situation. Having a budget may be an excellent place to start. Choosing the right credit card and having a cautious attitude towards credit helps.  

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