Students and former students who are burdened with two or more student loans may benefit from consolidating their loans into a single loan called a “consolidation loan.”

Consolidation loans come in two varieties: federal consolidation loans and private consolidation loans. Which should you choose? Simply put: federal consolidation loans are ideal when you want to refinance federal loans such as Stafford Loans, Federal Perkins Loans, PLUS Loans, HEAL Loans, FFELP and Direct Loans.

Meanwhile, private consolidation loans are designed for consolidating loans that were received through private institutions such as private banks.

Differences In The Two Types Of Consolidation Loans

Federal consolidation loans are available only as fixed-interest loans, with payback periods of up to 30 years. There are no credit checks required to get approved for a federal consolidation loan. And, there are no loan origination fees or application charges. Federal loans also allow you the opportunity to reduce your interest rate by 0.6% by consolidating within your grace period.

Meanwhile, private consolidation loans are offered at a market interest rate that may be a fixed or variable rate. These rates are calculated based upon either the LIBOR or Prime Index, plus a margin based upon the borrower’s (or co-signers) credit score. Private loans have an origination fee of 0% to 8%, based upon your credit score. However, sometimes these origination fees can be capitalized (added to the loan principal), which helps the borrower to avoid out-of-pocket expenses at the time of loan closing.

The bottom line is that the type of loan you select is dictated by whether you have private or federal loans in the first place.

Finding A Student Loan Consolidation Company

Finding the right student loan consolidation company can make the difference between your getting excellent and poor loan terms. With private student loan consolidation, there are fewer restrictions in place on the type of loan you can qualify for, as compared to federal consolidation loans.

In general, the following steps can lead you to the right loan consolidation company:

1. Search for, locate and make a list of at least five (5) lenders who say they specialize in student loan consolidation. Reason: there is no need to waste your time with lenders who do not specialize in this particular type of loan.
2. Find someone willing to co-sign the loan with you, if you can. Doing so will increase your chances of approval for a private consolidation loan and could also lower your interest rate.
3. Fill out a consolidation application with all of the lenders you found who seem credible.
4. Compare offers and make a decision.

The right student loan consolidation company can help you to lower your monthly student loan payments, while simplifying your life by helping you to have only one bill to pay.