Many people choose to use the
help of student loans, both federal and private, to pay for their higher
education and related expenses. When it comes to repaying these loans, some may
choose a student consolidation loan. There are two different types of
consolidation loans for student debt depending on the type of loans that you
have. These two are known as federal student consolidation loans and private
student consolidation loans.
Federal consolidation student loans are used for federal student loans. In the
majority of all student debt situations regarding federal loans, it is wise to
consolidate with a federal consolidation loan rather than a private
consolidation loan. With a federal consolidation loan, a student can consolidate
all of his or her Federal Family Education Loan Program (FFELP) and Federal
Student Direct Program (FDLP) loans. These include the Stafford Loan, the PLUS
Loan, and the Perkins Loan. Fortunately, federal consolidation loans have no
fees or prepayment penalties attached. In choosing to use a federal
consolidation loan, a student will have one monthly payment with a fixed rate of
interest. Also, his or her term with the federal consolidation loan will be
longer than the previous loan terms. The interest rate will be determined by the
weighted average of all the previous student loans interest rates and loan
amounts. Also, the interest rate for federal consolidation loans will not exceed
8.25 percent. Overall, there are several benefits of using a federal
consolidation loan that are not granted with private consolidation.
Many students have both federal and private student loans that they wish to have
consolidated. In this situation, consolidating them together is not recommended.
In most cases, this is not even an option granted to the student or borrower.
Private consolidation student loans are made by private lenders as the name
infers. Perhaps the greatest difference between private consolidation loans and
their federal counterparts is the interest rate. As mentioned, a federal
consolidation loan’s interest rate will be fixed and not exceed 8.25 percent. On
the other hand, with a private consolidation loan, the interest rate may be
variable or fixed. With many private lenders, consolidation loans incur various
fees and prepayment penalties unlike federal consolidation loans. Private
consolidation loans are used for private student loans that are typically based
upon credit score. With this said, private consolidation may be a good choice
for those that have increased their credit score since they received their
private student loans. There are countless private lenders willing to
consolidate your private student loans. Be sure to consider their rates, fees,
and other terms before making your final decision.
As always, do your homework before deciding on a specific consolidation loan.
More importantly, consider whether or not student loan consolidation is your
best choice. If you are deciding to go with a private lender for your private
student loan debt, make sure to inquire upon all of the loans terms. Remember,
even if your monthly payments are lowered it is still extremely important to
make them on time.
Federal Consolidation versus Private Consolidation