Top 5 Private Student Loan Consolidation Questions and Answers

Going for a student loan consolidation naturally brings a host of questions that should be answered. Here are some common areas of concern that should be addressed before moving forward with a program.

1. How do I get a lower interest rate?

Having a strong personal credit history and/or a cosigner with strong credit history is a surefire way to earn a reduced interest rate on a private student loan consolidation. An applicant’s positive payment history demonstrates reduced credit risk, enabling lenders to offer lower consolidation rates, reflecting creditworthiness.

Former students may hold high-rate private student loans due to limited credit ratings or those of their cosigner. After graduation, employed borrowers may improve credit ratings through timely payments, reducing high-rate private student loan burdens. Basically, the better the credit of the applicant and/or cosigner, the lower the interest rate can be.

2. Can I consolidate federal and private loans together?

This answer depends on  your lender. Some lenders do offer refinancing and consolidation options for both federal and private student loans.. Federal student loans like the Stafford loan, Direct Loans, Plus loans and Perkins loans are generally consolidated through the Federal Direct Loans consolidation program, from the Government. This government consolidation will not accept any private loans as part of the application. However, many private lenders will consolidated and refinance both private and federal student debt.

3. Should I get a fixed rate or variable rate?

There is a trade-off for either, and the applicant must decide based on their own preferences. Today, a variable rate loan can provide a very low rate especially for borrowers with strong credit. The variable rate will adjust over time to reflect the underlying rate index the loan is based on like Prime or LIBOR. This works very well for the borrower while rates remain low. However, if rates were to increase in the future, more interest could be generated from the application.

With a fixed rate loan, the rate stays the same throughout the loan term, creating a very predictable repayment schedule regardless of general market interest rates. Lenders generally provide a higher interest rate on a fixed loan than what would be offered on a variable rate loan. This program can work very well for a borrower if general market interest rates were to increase above the fixed rate on the loan application, however, if interest rates remain lower than the fixed rate loan it would probably cost more to repay.

Compare options based on which program creates the best debt elimination scenario for you. With a low variable interest consolidation rate, consider paying above the monthly minimum to eliminate debt faster. For a fixed rate loan, try to secure as low a rate as possible to make it less costly to repay now. You can learn more about variable vs. fixed rate student loan refinancing here.

4. Can I extend my term?

The loan term is the number of years of payments required to repay a loan. Many, but not all private student loans have 10 year repayment terms. A private loan consolidation may offer longer terms, reducing the minimum monthly payment but ultimately costing more interest to repay in full. Extending a loan term is a simple way to reduce the loan payment each month, and may provide a cash flow management solution that fits the budget. Make sure to compare the number of term years in the consolidation with the individual loan applications to know the difference.

5. How can I accelerate debt elimination?

The fastest way to debt elimination is through making extra loan payments. Just confirm if the consolidation has any pre-payment penalties that would add on costs for making all the extra payments.

For more debt management tips, download the Debt Management Survival Guide.