What is Private Loan Consolidation?

Private loan consolidation combines all of your private student loans into one new loan. For example, if you have private loans with multiple lenders, a private consolidation loan will pay off the balances with those lenders and create one new loan for the entire balance (see example below).

Why Do I Need to Consolidate Private Loans?

Not all borrowers can or should consolidate private loans. Just like when you applied for your private student loans, private consolidation loans are also credit-based and you will need to be approved. If you are a new graduate with little history, or you have bad credit, it will likely be difficult for you to obtain a private student loan consolidation without a co-signer. That being said, some benefit of a private loan consolidation include:

1. Lower Monthly Payments

   Many private loans are made with a ten year loan repayment term. If you have significant private loan debt, your monthly payments could be extremely high, especially as a new graduate earning an entry-level salary. Private student loan consolidation may enable you to extend your loan term, thereby lowering your monthly payments.

2. Potential for a Lower Interest Rate

   While you were in school, you probably didn’t have enough credit history to take out private loans on your own. If you used a co-signer to help you get approved, the interest rate on your loans was most likely based on your co-signer’s credit history and the underwriting criteria of your lender. Once you establish income and build a positive credit history, you may want to try applying for a private student loan consolidation. You may be able to reduce your interest rate and save hundreds or thousands of dollars in interest savings. If you still can’t qualify for a lower interest rate, most private loan consolidation lenders will allow you to apply with a co-signer.

   Keep in mind that lenders generally charge an origination fee for your new private loan consolidation. You will need to weigh this fee against your interest savings to see if you will benefit from a private loan consolidation.

3. One Monthly Payment

   In addition to lower monthly payments, many borrowers enjoy the convenience of having to make only one student loan payment every month. If you have federal student loans, make sure you keep them separate from your private loan consolidation. You can consolidate your federal loans separately using a federal loan consolidation.

4. Lender Benefits

   Although lender benefits will probably not outweigh the costs of a private loan consolidation, if you have a good credit score and a lender is offering additional benefits to consolidate with them, you may be able to improve your current situation. Keep in mind that you generally have to make a certain number of on-time payments in order to qualify for the lender benefit, so don’t count your chickens before they hatch.

Don’t Consolidate Private Loans with Federal Loans

Federal loans are the lowest cost student loans available, and they come with some great federal program benefits. For example, if you have Subsidized Stafford Loans or Perkins Loans, the government will pay your interest while you are in-school or deferment. You don’t want to lose these federal benefits by putting your federal loans into a private student loan consolidation. If you did, your federal loans essentially become private loans. Even if your private loan consolidation interest rate seems low initially, keep in mind that it’s probably a variable rate loan that will adjust monthly or quarterly.

Where Can I Get a Private Student Loan Consolidation?

There aren’t too many lenders offering private student loan consolidation today. Finaid.org keeps track of all the lenders offering private student loan consolidation.