In the United States, nearly 70 percent of college graduates leave university with student loan debt. Of those with loans, the average debt amount is close to $40,000. Student loan debt can comprise multiple loans from different lenders. It can include federal or private loans, or both. You could end up managing payments to multiple banks and dealing with different interest rates, which not only complicates your budget but costs you a lot of money in the long run.

If you're in debt after completing your education and not sure what to do, you have two options for simplifying the repayment process. Both can help you lower your interest rate or payments and combine several loans into a single loan.

Consolidating student loans generally applies to federal loans. It allows you to pay your loans as one, while still retaining any benefits associated with the program. Refinancing means taking out a new loan to pay off the other loans so you have only one loan. While this can save money, refinancing a government loan means you lose associated benefits.

This article talks about student loan consolidation, but it also discusses strategies for paying off student debt without taking out a new loan. It's focused on federal programs as opposed to private loans. If you have private loans or are considering refinancing your private and federal loans, check out our article on student loan refinancing.

Student Debt Consolidation: Let's Get Our Terms Straight

We know. An article that starts with a vocabulary list is like being in school again. However, to understand the potential advantages of student loan consolidation and determine the best service for you, it's important to understand the differences between the different types of loans and what consolidation really means:

Federal Student Loans: These loans are granted by the U.S. Department of Education and come with unique benefits such as loan forgiveness for specific career fields or income-based payment. You would not have been required to start paying these loans off before graduation.

Private Student Loans: These are loans you took directly from a bank. You would have started paying on them immediately. Rates, fees and terms vary widely by lender, and you don't have the same perks as with federal student loans.

Consolidation: This is the act of combining two or more loans into a single loan. You can do this two ways: With federal loans only, you can apply for a Direct Consolidation Loan from the U.S. Department of Education. For private loans – or a combination of private and federal loans – you can only consolidate through refinancing. Some banks nonetheless call this consolidation, but make no mistake: This is a new loan that pays off other loans.

Refinancing: Refinancing simply means getting a new loan to pay off your old loan or loans and then making payments on the new loan. In most cases, the lender pays off your student loans directly and then you start making payments on your new consolidated student loan.

Consolidating Federal Student Loans

If you have federal student loans, you can consolidate them through a Direct Consolidation Loan with the U.S. Department of Education. Consolidating federal loans may allow you to keep the government benefits. This option does not apply to private loans.

Do It Yourself. You don't need a degree in rocket science to figure out how to consolidate your student loans, but you will have to deal with government bureaucracy, which can seem just as trying and complex. It's completely free to apply.

The Federal Student Aid (FSA) Office of the Department of Education can work with you on finding the best consolidation loan program for your needs. There are several programs, including some that let you make payments according to your income and to apply for debt forgiveness.

When applying with the FSA, you go to their website, enter your FSA membership number, which you should have from your federal student loans, and apply for a Direct Consolidation Loan. The website will lead you through the process. The application takes about 30 minutes to complete, and you can call an FSA counselor if you have questions.

Get Third-Party Help. Not everyone is comfortable with paperwork or dealing with the government. Some people are simply busy and prefer to pay someone else to handle it for them. If that's you, there are some federal student loan consolidation services that deal specifically with helping you apply for student loan consolidation with the government. These companies have access to the same information as you, but agents may have more experience with the application process.

Most of these companies do not provide financing themselves but charge a fee for doing the paperwork. They offer their experience and knowledge of government programs, and in some cases, they can determine if you are eligible for forgiveness or other programs that might lower your loan balance. You can get this same information from the FSA, but it takes research. Thus, these organizations are good choices if you are busy, confused about the process, or you're in financial crisis and seeking help.

Of course, you pay a price for this service. We found fees ranged from $400 to $1,300, depending on the company and the complexity of your loans. Often, rather than completing the paperwork and then making payments to the government, you pay the consolidation company instead.

Some of these companies work with private lenders and may suggest refinancing as a better deal. In addition, these services sometimes deal with people who are in default or are dealing with wage garnishments. You can expect to pay a higher fee in these cases.

To be eligible, you must have one or more federal student loans that are not in default. There is no minimum loan amount to apply for consolidation. The representative will collect information about you, your loans and your income, and may do a soft pull of your credit report.

The rep then prepares and files the paperwork for you, contacting you for the needed additional documentation, which can include copies of your current student loans, W-2s or other proofs of income, plus any information that could show whether you are qualified for a special repayment program or not.

Consolidate Federal Student Loans Through Refinancing. Your third option is to combine your loans by refinancing them as a single private loan. Many of the lenders in our Best Student Loan site do this. This option lets you consolidate several or all of your loans into a single loan. If you wish to include federal loans as well as private ones, you can do that too.

Why refinance? In the case of federal student loan consolidation, the U.S. Department of Education sets the new interest rate by determining an average of the rates of the federal loans you're consolidating. Therefore, refinancing may give you a better interest rate, especially if you have a good job and your credit rating is strong.

The concern when refinancing is the loss of program benefits, like debt forgiveness. If this isn't a concern for you, then consider refinancing. Even if you keep your federal loans, you can refinance any private student loan debt and consolidate the federal debt so you deal with two loans.

Student Loan Consolidation Companies: What You Should Look For

Student loan consolidation services that work with federal student loans have two methods of operation: one type does the paperwork for you, while the other assumes your loan, works with the government for a payoff schedule, then processes your payments.

There are some legitimate consolidation companies but also a lot of fly-by-night organizations. Therefore, as you choose the best student loan consolidation service for you, consider the following:

Services. Student loan consolidation companies generally fall into two camps: Those that assist you with securing a Direct Consolidation Loan from the Department of Education or those that refinance your loans. Of those that refinance, most will refinance your federal loans.

Not all consolidation services are licensed to work in every state, so check the website and ask the customer service rep.

Consolidation Terms & Fees. Consolidation services (as opposed to refinancing lenders) charge heavy fees. You are paying them to handle the paperwork and negotiations you might otherwise do yourself. Before hiring one of these services, make sure the convenience factor is worth the fee you will pay.

Terms are set by the federal government, but since some consolidation companies require you to pay them rather than Uncle Sam, verify that the terms are identical or more beneficial for you than if you worked directly with the Department of Education.

Some of these services also offer a money-back guarantee if you are rejected for a Direct Consolidation Loan. Ask about this when checking out companies.

Help & Support. If you're a recent graduate, you may not be familiar with the steps involved in securing a loan. Therefore, it's important to find an institution that works patiently with you throughout the process, that takes the time to explain things and that won't pressure you into decisions.

The agents should understand the process. Check the websites to see what articles and calculators they offer. These tools demonstrate an interest in helping you make informed decisions. Also, chat with the customer service representative before applying. Look for these red flags:

* Refusal to answer questions until they can do a soft pull on your credit
* Unable to answer questions about programs you qualify for
* Pressuring you to sign up for the program
* Scare tactics or overblown promises

Still in School? Many consolidation programs are only for graduates. Some even require that you have been working and paying off your loans for a given number of years before applying. A few will let you apply if you are close to graduating.

Paying Back Your Student Loans

Even if you choose not to consolidate your student loans, there are ways to pay them off more quickly. We cover a few of them here. Check out our other articles on paying off debt and financial management for even more tips.

See if you qualify for waivers. If you have federal student loans, there are some conditions where loans can be waived. This includes community service and extreme financial need. Check with the Federal Student Aid Office for more information. Consolidation services should check these options for you as well.
Are you in a public service field? You may qualify for loan forgiveness. This federal program allows you to get your federal student loans forgiven after 10 years of full-time employment in select public-service fields. You will have to make 120 payments on your loans while employed in public service.

Deferred payment? Make payments, anyway. Student loans differ from other types of loans in that they offer deferments. This means that in most cases, you do not have to make payments on these loans until after you have finished your schooling. However, this feature is not found across the board. Some banks require small payments while you are still in school. In general, these payments are low – about $25. These in-school payments pay down the interest on your loan so it is not added to your loan after you graduate.

When you defer payment, you are not required to make payments while you are in school. If expenses are tight, this might be a good option until you graduate. It's important to keep in mind, though, that most private loans accumulate interest while you are in school. This accumulated interest is then added to your loan's lump sum when you graduate. Therefore, even if you have deferred payment, you're better off in the long run making some payments while in school.

A few dollars a month over the course of four years can make a big difference in how much you pay upon graduation. For example, if you pay only $25, a month, that's $1,200 off your loan – a significant amount if your loan is only $5,000.

Pay more than the minimum. Loans include a portion of the overall interest with each payment. However, if you pay more than the minimum, this goes toward the principal amount you borrowed. Even paying just a few dollars extra each month lets you pay off the loan early, which saves you interest.

Pay using the snowball method. This method involves paying off one loan fast, then putting that payment amount into the next loan, paying it off, putting that amount into the next loan, and so on. There are a few strategies for this. To learn more about them and see how the math works, check out our article on the best ways to pay off student loans.

Education is expensive and getting more so each year. As a result, student loan debt has become a fact of life for most graduates. Even federal student loans can be a burden, especially if you've taken out more than one over the course of your college years. If balancing multiple payments is weighing you down, consider a Direct Consolidation loan from the government. You can do this on your own or with the help of a service. Alternately, there are other ways to pay off debt quickly. Whatever route you choose, getting out of debt, even low-interest student debt, is the best way to ensure a brighter future.

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