Are you considering consolidating your student loans? There are many reasons to do so, such as having to make fewer payments each month (before consolidating my own student loans I was writing out five different checks each month), having to keep track of fewer due dates, and locking in a lower interest rate.
Whether or not you should consolidate your student loans is outside the scope of this article; however, if you have decided to move forward, then how are you supposed to compare consolidation rates to find the best one for you?
Private Versus Federal Student Loan Consolidations
With a federal consolidation, there is no shopping around for interest rates. Instead, 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%. Federal student loans come with many perks, so you would generally not want to consolidate your federal student loans with a private lender.
However, private student loans cannot be consolidated through the Federal Direct Loan Consolidation Program, so you have the opportunity to compare rates to find the best one.
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Comparing Private Student Loan Consolidation Rates
Interest rates on private student loans are based on your credit score. Chances are good that your credit score has gone up since graduation if you have been making on-time payments on your loans. Here are the steps you need to take to compare interest rates:
1. Figure Out Where You Can Compare Rates: There are two ways that you can consolidate private student loans. The first, if you are a homeowner, is through a Home Equity Line of Credit (HELOC). The second is through an education lender.
2. Start with Your Original Lender: No matter which way you want to consolidate your student loans (through a private lender or through a HELOC), you should start with your original student loan lender. First, make sure you know the interest rates on each of your loans so that you know what to shoot for. Next, tell them you are shopping around for loan consolidation rates. Ask what their best offer is for you. You will need to make sure the rate they quote you is fixed (variable rates are available, but not advisable from a financial viewpoint), whether or not you will incur any prepayment penalties on the new loan, and if there are any fees involved.
3. Call Around to Other Lenders: Next you will want to ask for interest rate quotes from different companies to see whether or not they can beat the rate you were quoted. Check out this list of education lenders and see if there are any you feel comfortable with.
In order to keep everything straight and fair in your comparisons, you might want to build a simple excel spreadsheet where you record the lender name, loan interest rate of consolidation, the date of loan payoff using that lender (some consolidations will come with longer terms than others, meaning you could end up paying more interest over time), and any special terms (such as fees).
There is a lot to consider when figuring out whether or not you want to consolidate your loans. Don’t miss out on another important step that could cost you a lot of money over time: shopping around for the best fixed interest rate package from lenders for your private student loans. Even though a deal may look good, you need to fully vet the lender with the questions above, and then compare their offer to other offers. Most importantly, continue to make regular payments on all of your student loans in the meanwhile to up your chances of getting a better interest rate.
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