Federal consolidation loans are instruments to refinance federal education loans only. Private consolidation loans are a way to refinance private education loans only. The major difference is that while a federal consolidation loan comes with a fixed interest rate that follows a set federal formula, private consolidation loans come with a market rate that may be fixed or variable.
If you consolidate both federal and private loans you should make sure to keep them separate. This is because refinancing a federal loan with a private consolidation product will most likely result in a much higher interest charge than you'd pay if you kept them apart.
Here are some of the benefits you might find attractive in private consolidation loans:
- Longer repayment term (up to 30 years in some cases)
- Potential release of co-signer from the original private loans
- Lower monthly payment
- One monthly bill
Weigh this decision thoughtfully, as a longer repayment term usually means a greater cost of borrowing as you pay interest for more years. Also, make sure to consider the interest rate on the private consolidation loan versus your existing private loans - rate structures can vary widely.
Which of the lenders is right for me?
If you've weighed the pros and cons, and decided that consolidation is right for you, the next step is to pick a lender. Just like when you want to buy a new PC or a car, you need to shop around for the best deal. For federal student loans, go to the Department of Education’s site and obey the instructions relating to completing consolidation online. Do your homework – compare all the types of loans you qualify for, read the fine print on different Borrower Benefits, and run the numbers.
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