Thank you for your question about finding the best rate when consolidating your student loans. You did not specify whether you have federal student loans, private student loans, or a combination of both, so I will try to give you some general information.
Looking into a student loan consolidation makes good sense, but loan interest rates are not the only consideration. The size of your monthly payment is also an important factor. You may want to consolidate for as long a payoff term as possible, so you end up with the lowest payment. Even if you end up paying more interest by extending your term, it can make sense to do this if you need to have a small payment to avoid defaulting on your loan.
A student loan consolidation will also allow you to make one payment for all of your student loans. It is simpler to manage and stay on top of one payment, than it is on multiple payments, so a consolidation makes it easier to avoid accidentally skipping a payment.
Private Student Loans
Private student loans are made only if you qualify for the loan. In order to qualify, you will be judged on your credit rating and debt-to-income ratio. You need to demonstrate to the lender that you are a low risk. With a private student loan consolidation, the better your credit score, the more favorable your interest rate will be. However, if you do not have very good credit at a minimum, you may not find any lender willing to work with you.
If your credit or income prevents you from qualifying for a private student loan, then you may have to find a co-signer in order to qualify. A co-signer takes full legal responsibility to repay the loan, if the borrower defaults, so a person should be very wary before co-signing.
The interest rate you will get on a private student loan will be an adjustable rate loan. Your interest rate is typically tied to an index, such as the Prime Lending Rate or the LIBOR, as well as a margin that is added based on your individual credit profile and credit score. Rates are generally competitive amongst the lenders that still consolidate private student loans, but there are far fewer lenders offering this product than there were a few years ago.
Federal Student Loan
As of mid-2010, all federal student loans are administered through the US Department of Education’s (DOE) Direct Loan program. Federal student loans are based on need, not on credit or income qualification; the eligibility requirements are NOT the same as for a private student loan. To qualify for a federal Direct Consolidation Loan:
- You must have at least one Direct Loan or Federal Family Education Loan (FFEL) that is in grace or repayment.
- You can consolidate most defaulted education loans if you make satisfactory repayment arrangements with the current loan servicer(s) or agree to repay your new Direct Consolidation Loan under the Income Contingent Repayment Plan or the Income Based Repayment Plan.
- If you have a Direct Consolidation Loan, you cannot consolidate again unless you include an additional FFEL or Direct Loan. If you have a FFEL Consolidation Loan you also may be able to consolidate again under certain circumstances.
Federal Student Loan Interest Rates
According to the DOE, “...a federal Direct Consolidation Loan has a fixed interest rate for the life of the loan. The fixed rate is based on the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth of 1% and cannot exceed 8.25%.” Visit the DOE Web site, to apply for a federal Direct Consolidation Loan.
Before you apply for a student loan consolidation loan (or any loan), check your credit report to make sure that all the information on it is inaccurate. You do not want to be turned down for a loan that finances your education, because false information disqualifies you.
As the Dept. of Education points out, “...you also should take into account the impact of losing any borrower benefits offered under repayment plans for the original loans. Borrower benefits from your original loan, which may include interest rate discounts, principal rebates, or some loan cancellation benefits, can significantly reduce the cost of repaying your loans. You may lose those benefits if you consolidate.” Review your original loan terms so you do not lose an important benefit.
Lastly, you should consider submitting your application for consolidation two months before the end of your grace period, as they can easily take that long to process.
I hope the information I provided helps you Find. Learn. Save.