Student Loans Consolidation: Combining Federal and Private Debt

High college costs have forced many students need to borrow money to pay for tuition, books and other educational necessities. Borrowers are faced with a variety of choices between federal and private student loans. When repayment terms kick in, borrowers can get overwhelmed trying to manage numerous loans and individual payments due throughout every month.

Many borrowers attempt to simplify the repayment process by securing consolidated loans. In many cases, securing consolidating loans can ease cash flow problems. However, borrowers must be aware of potential issues involved with combining both federal and private loans into a single consolidated loan, compared to securing separate federal and private consolidated loans.

Differences Between Federal and Private Student Loans

Federal student loans provide benefits that are not available with private loans. For example, interest paid on federal student loans is tax deductible. In addition, federal loans can sometimes be deferred if the borrower returns to school. Also, the U.S. Government may partially or completely forgives loans in exchange for certain types of service, including federal volunteer programs, teaching in economic development zones and military service.

On the other hand, private student loans do not have these advantages. Instead, they are simply either secured or unsecured loans obtained from private sources that must be repaid like any other loan.

Problems Combining Federal and Private Loans

The previously mentioned disparities cannot coexist in a single consolidated loan. Therefore, when combining public and private loans, borrowers must secure a single consolidated private loan that loses all the benefits of federal loans.

Disadvantages of combining federal and private student loans into a single consolidated loan include:

  • Unlike federal student loans, private loans often come with variable interest rates that may be tied to volatile indexes and rise over time into double digit percentages
  • Inability to claim paid interest as a tax deduction
  • Payments cannot be delayed in cases of economic hardship
  • Borrowers cannot apply for loan forgiveness
  • Payments cannot be deferred if the borrower returns to school
  • In case of death, outstanding debt will be passed on to the borrower’s next of kin (federal loans are forgiven)

Keeping federal student loan consolidation separate from private loan consolidation allows the borrower to retain government benefits.

Consolidate Federal Student Loans First

When both federal and private student loans exist, the borrower should always consolidate their federal loans first. During the course of obtaining a four-year college degree, students may take out up to eight or more federal loans, as well as private loans to pay their expenses. By consolidating the federal loans first, borrowers will reduce the number of open items on their credit reports. This will increase the borrower’s credit score, which will help them obtain better terms on a private loan consolidation.

Being aware of all the advantages and disadvantages of different types of student loan consolidations enables borrowers to realize lower monthly payments without losing benefits only associated with federal loans.