Think consolidation’s a good idea for your private loans? Think again.
First, private loans can’t be consolidated with federal loans under the federal loan program, meaning you won’t be able to get a lower rate (as you may have in the past with federal consolidation). You can, however, use private consolidation to get one monthly payment but remember that a lower payment now means you’ll pay more in the long run (and probably have a longer repayment term). Keep in mind, too, that private loan consolidation almost always comes with a variable rate, not a fixed rate, so expect your rate to fluctuate from season to season.
If you do want to consolidate your private loans, be sure to stick with a lender who is an education loan lender, rather than a commercial debt consolidator. Education lenders are far more in tune with student-borrower needs. For example, they may offer opportunities to postpone payment if you re-enter school, whereas a commercial debt consolidation company is not likely to have such services.
And one last thing you never want to do is consolidate your federal loans into a private loan consolidation. Federal loans are eligible for a fixed and typically much lower interest rate than private loans. Definitely keep them separate.
Some lenders want to play on the naiveté of the student and “sell” them on first consolidating their federal debt and then look at their private loans. It also happens that many students will not qualify for the private loan consolidation and have potentially made a poor choice on who holds their federal loans.
Before you consolidate private loans, be sure to ask these questions:
- Is it a fixed or variable rate loan?
- If it is variable, what is it based on and how often will your payment change? How does this compare to the percent rate that you currently have?
- What fees are involved?
- What is the credit criteria for private loan consolidation and how many students are being approved versus denied? What about credit tiers? What is the highest variable or fixed rate that could be assigned if credit score is low?
- What repayment benefits are offered on private loan consolidation?
- What are the requirements to receive repayment benefits, and how could you lose these benefits?
- How do the private consolidation loan repayment benefits stack up against your current private loan benefits?
- Are there any pre-payment penalties?
A few more tips:
- Use electronic bill pay through your bank, which is typically free and eliminates postage. It also allows you to set it up as a monthly payment you make through your bank (you push versus the lender pulling money from your account = more control on your side)
- Pay down your highest-rate debt first. One way to do this is to lower your payment on your low-interest debt (like your Stafford loans). The idea is to attack your higher-rate debt first so you’ll pay less in interest costs.
- If you choose to consolidate your private loans, pick a reputable company. There are a lot of predatory lenders out there who simply want to take advantage of you—and your wallet.
- Seek the guidance of your financial aid professionals. They have many years of experience in the industry and can help you make the best decision for your situation.
If you have federal loans managed by the federal direct loan servicer, then you should definitely sign up for auto-pay, as it may save you part of a percent on the rate, as does making payments on time for the first year. I believe consolidation is available directly through them as well, to lock in a rate.
I wish I could have read this article 4 years ago when I was graduating from undergrad. I unfortunately consolidated my private loans and have a variable interest rate on all my loans close to almost 10%. If I didn't consolidate I would have at least two loans paid off by now, but I've barely made a dent in my private loan debt. My suggestion: before consolidating any loan debt, whether it be stafford loans or private loan debt, always consult your financial aid administrators. They are there to assist you with all questions you have. If only I had asked mine:(