American college graduates, and others who have taken out student loans, are drowning under record debt.
According to the Federal Reserve, U.S. consumers - 44 million borrowers in all - owe $1.4 trillion in student loan debt in 2017. That's a staggering total, especially given that figure stands at $620 billion more than all Americans owe in credit card debt.
Data also show the average monthly student loan payment is $351 and that 11.2% of college borrowers are already delinquent on that debt in 2017.
Is there a way out of what many college borrowers understandably view as a debt nightmare? Maybe - if the path to financial solvency goes through student debt consolidation.
Student loan consolidation enables borrowers to "bundle" all their college loans into one single loan, with one single monthly loan payment (that includes student loans your parents have taken out.)
There are caveats. You may or may not get a lower interest rate, depending on your lending institution, and you can't bundle non-student loan debt into newly consolidated loans, if you've been borrowing via federal government student loans.
In general, there are three primary benefits to taking out a consolidated student loan, says Stephen Dash, CEO r at Credible.
--- "First, you may be able to qualify for a better interest rate, which can save thousands in repayment costs," says Dash. (At Credible, Dash has seen new student loan consolidation borrowers save $19,000 in total loan costs, which is why it's so important to keep hunting for the best loan deal.)
--- "Second, you can also change your loan repayment term -- stretching it out will lower your monthly payment, but could increase your overall repayment costs, particularly if you don't get an interest rate reduction," he adds.
--- "Third, if you have multiple loans, refinancing leaves you with one convenient monthly payment," Dash states.
Dash notes there is a difference between federal loan consolidation and refinancing with a private lender. "A federal direct consolidation loan allows you to combine several federal student loans into a new loan with a single payment, and also change your repayment term," he says. "But you don't get a lower interest rate. Your interest rate is a weighted average of your existing loans, rounded up by one-eighth of a percentage point."
"To get a better interest rate on your student loans, you typically have to refinance them with a private lender," Dash adds.
A secondary benefit of student loan consolidation is that it can potentially help borrowers get a mortgage. "For many graduates with student debt, a high debt-to-income ratio stands in the way of buying a home," says Michael Lux, founder of The Student Loan Sherpa, in Indianapolis. "If you can consolidate to reduce your monthly payments, it will improve your home-buying ability."
On the downside, borrowers should be aware that they may lose some benefits with both federal loan consolidation and refinancing.
"With federal loan consolidation, your total repayment costs can rise if you increase your repayment term," Dash explains. "This is particularly true for borrowers who won't qualify for loan forgiveness."
"Also, if you've enrolled in a federal repayment plan that could qualify you for loan forgiveness after 10, 20 or 25 years of payments, you should be aware that if you consolidate your loans, you may lose credit for payments you've already made," he adds.
What are the best ways to go about consolidating a loan?
According to Lux, the "best approach" for student loan consolidation is to shop around.
"Each lender evaluates applications differently which means the only way to find your best rate is to actually apply," he explains. "It's also worthwhile to revisit your consolidation if interest rates drop or your credit score and income improve. Unlike a mortgage refinance, there is no transaction cost associated with consolidating or refinancing your student loans."
Institution-wise, traditional banks have largely gotten out of the student loan consolidation marketplace, due to slim profit margins, Lux says. But plenty of borrowing landing spots still exist.
"Wells Fargo is probably the last of the large financial institutions left in the business," he says. "However, many regional banks and credit unions still offer student loan consolidation. There are also a number of somewhat recent start-ups offering consolidation services."
Currently, about 12 million borrowers have active consolidated loans in play, for a total of $464.5 billion, according to the college financing site, Student Loan Hero, citing data from Studentaid.ed.gov.
With that many borrowers opting for new student loans, the proof really might be in the pudding.
Under the right circumstances, consolidating your student loan can make your debt burden easier to handle, as long as you honor the terms of the new loan, and remain dedicated to paying it all back.
Editors' pick: Originally published Aug. 18.
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