Consolidating student loans after default
The interest rate is primarily determined by the lender’s evaluation of the borrower’s credit history.However, some lenders also factor in the borrower’s current financial and professional circumstances.We start by discussing the basics of student loan consolidation and refinancing, and comparing the benefits and drawbacks of federal and private consolidation loans.We then detail a step-by-step guide to using and choosing consolidation loans.To be eligible, borrowers must have a clean credit history and a “good” FICO credit score (“good” is 670 and above according to FICO).
A weighted average means that the loans with a higher balance influence the interest rate more than loans with a smaller balance – the overall impact of each old loan on the new interest rate is proportional to the comparative balance of that loan.
All types of federal student loans can be consolidated together except a Direct PLUS Loan that was taken out by a parent to help pay for a child’s education (student PLUS loans can still be consolidated).
However, private loans can’t be included in a federal consolidation loan.
In short, the term “consolidation” is used to describe the process of combining multiple loans into a single loan while the term “refinancing” is used to describe the process of using a more advantageous loan to repay an older loan.
While refinancing is often used in other realms of finance (like mortgages) to describe repaying a single older loan with a new loan, consolidating with a private loan technically includes refinancing as well since the term and interest rate of the new loan are different from the old loans.