Student Loan Plan: Consolidation Tips For Federal Student Loans

Michael Lux Blog, Consolidation, Student Loan Plan, Student Loans 0 Comments

In this edition of the Student Loan Plan, we take a look at Tim’s options when it comes to consolidating his federal student loans.  If you have questions about your student loans, feel free to get your question answered by the Sherpa.

Tim writes:

Hello Mr. Lux,

Ive been going back and forth, thinking about if I should consolidate my federal school loans or not. I’ve done some research and asked friends, and now I am more confused than I was before. Maybe you could help me out. So, here is the break down of my federal loans:

3- Direct Subsidized loans:

1.) $4161 @ 4.5%
2.) $5051 @ 3.4%
3.) $5137 @ 3.4%

5- Direct Unsubsidized loans:

1.) $4092 @ 6.8%
2.) $3045 @ 6.8%
3.) $7933 @ 6.8%
4.) $7469 @ 6.8%
5.) $5763 @ 4.66%

Now, my first question to you is, can I take this to Navy Federal and consolidate my loan through them? And if not, how would you handle this loan (if it were yours)? My second question is, would it be better to just consolidate the higher interest rate loans and keep the low ones as is? Overall, I really need some good advice/guidance on what is the best way to handle my federal student loans. Thank you for reading my email!

P.S. My work does not qualify for Public Service Loan Forgiveness

The Plan

Navy Federal has a great reputation, especially compared to many banks.  Unfortunately, just consolidating through Navy Federal is not an option for Tim.  As a general principal, we suggest shopping around to see which of the many student loan consolidation companies has the best rates.  Even if Tim was willing to pay a higher rate just to work with Navy Federal, the option still will not work because Navy Federal only offers consolidation services on Private Student loans, and Tim’s loans are federal.

We actually applaud Navy Federal for taking this position as consolidation of Federal Student loans can be a huge mistake for many people.  By consolidating your federal loans into a private loan, you give up many benefits, such as Public Service Student Loan Forgiveness.  Judging by Tim’s email, it appears he has decided that he will definitely not be pursuing public service, or ever be in need of the income driven plans that come with federal loans.  Only when you are certain that you will never need any of the perks that come with federal loans, should you consider private consolidation.  It appears Tim has made that decision, so we will proceed forward.

In this case, the plan is pretty easy: shop around for the best deal.  This is critical because all lenders apply different formulas when calculating interest rate offerings.  These formulas are closely guarded secrets, but from the consumer perspective, it is important to know that even if your friend got the best deal from company X, you might get the best deal from company Y.  To aid with shopping around, we have made a large table of student loan consolidation companies with links to their websites and our reviews.  This is a good starting point to investigate companies to find out what loans are available.  As long as you apply to all the lenders within a short period of time, credit agencies will call it shopping around treat it as one credit inquiry rather than many (this means little to no impact on your credit score).  We suggest doing all of your applications in a day or two.  The credit agencies still call it “shopping around” for several weeks, but the tighter the window the less risk.

Once you apply with a number of lenders you can do further research into the lenders offering the best rates and make some calls to the company to make sure you are comfortable working with them.

As for Tim’s last question, you should definitely only consolidate the loans where you can improve your rates.  There is no requirement that you consolidate ALL of your loans.  If Tim qualifies for a 4.5% consolidation loan, he can leave his 3.4% loans untouched and only include the ones that are improved by the 4.5% rate.  However, if you will only be including certain loans, make sure your lender knows which loans go in and which loans stay out.  There is no way to undo a student loan consolidation, so be very careful to get it right on the first try.