- 4 min read
- Consolidate your federal student loans separately from your private student loans.
- You main benefits are simplified payments, lower monthly payment or cheaper loan.
- Lender's require a co-borrower if your credit score is weak or DTI is high.
Private Loan Consolidation: Make it Work for You
Finishing school and joining the real world means dealing with your student loans that piled up. While in school, and even for a bit of time after leaving school, there exist deferment or grace periods. Like most students, you probably took out a mix of federal and private student loans with different amounts and repayment terms.
Private loan consolidation works by adjusting the payment schedule to meet your financial needs. You can look for a lower interest rate, increase the length of the loan, or pay off the loan quicker.
Goals and Benefits
The main benefits of private loan consolidation are:
- Simplified payment: Private loan consolidation rolls all of your loans into one, so you only have to make one monthly loan payment. Keeping track of your loan will be much easier.
- Lower monthly payment: By extending length of the loan, you lower your monthly payments, although your overall financial costs will increase.
- Cheaper loan: By shopping around, you may find that interest rates have dropped, and you can save money through a private loan consolidation. Your credit score will be a key component.
- Release the co-borrower: It is common for private student loan lenders to requires a co-borrower. If your current lender will not release your co-borrower from the loan, and your credit score is good, then you may be able to consolidate your private student loans without a co-borrower.
Qualifying for a Loan - Your Financial Picture
Before you shop around for a loan, gather your financial information. In order to consolidate your private student loans you will need to figure out what you owe and what you can afford to pay each month. A lender will apply their specific underwriting guidelines, looking at your debt to income ratio (DTI), credit history, and credit score. If you have bad credit or no income, then you will need a co-borrower.
Chart Out Your Student Loans
Make a list of all your student loans, separating your private from your federal student loans. Include the relevant information, including name of lender, balance, interest rate, monthly payment, and special notes (co-borrower, special payment terms).
Federal student loans have different repayment terms, usually at lower interest rate and longer repayment terms. There are special repayment and consolidation programs for federal student loans, as well as loan forgiveness programs. For more information, see the Bills.com article about student loan consolidation.
Figure Out What You Can Afford
Calculate the other side of the equation, how much you can afford to pay. Make a list of all your income and monthly expenses. Use a personal budget to help you determine whether you can make larger payments, or need to cut down your expenses, including your student loans. Remember, lenders look carefully at your overall debt, as well as the amount of your income you spend on your housing and recurring debt, such as credit cards, installment loans, student loans and auto loans. Calculate your debt payments, including mortgage, credit cards, and other recurring debt.
Adding a Co-borrower
If you cannot qualify on your own, then you will need to find a co-borrower. The lender will evaluate the co-borrower’s income, DTI, and credit score, just like yours. A strong co-borrower lowers the cost of the loan.
A co-borrower is responsible for the whole loan, for the entire period of the loan, unless released from the loan. The loan is reported on the co-borrower’s credit report, so any negative activity will harm the co-borrower’s credit score. Keep your co-borrower in the loop and inform them any time you have trouble making a payment.
Finding a Lender
Your next step to private loan consolidation is to find a lender. Compare lender offers based on the interest rate, fees, total amount offered, and co-borrower requirements.
Here is some information that Wells Fargo posts on its Web site about a Wells Fargo Private Consolidation Loan for students: Make sure you get a number of quotes, mixing the lender’s offer with your goals.
|Amount||$5,000 - $10,000 (maximum education debt of $250,000)|
|Interest Rate||Either Fixed or Variable. As of 4/4/12, 25 year: 7.99% -12.79%|
|Process Time||Approval takes 45 - 60 days from time of application.|
|Discounts||Wells Fargo offers discounts if you sign up for other products.|
Some of the big lenders have suspended their private student consolidation loan programs. Before you consolidate your student loans shop around for the best terms.