Question: I currently carry four student loans from three private lenders and it has been quite a hassle keeping track of all three in addition to other credit card debts. The Feds hikes rates recently, which means my monthly payments will likely go up. Should I consider consolidating my student debts before interest rates rise?
Answer: Consolidating student debt (or refinancing) is a viable option if you are making an informed decision. It may not work for everyone. Your best asset is knowledge when it comes to deciding if consolidating student debt works for you, and you have taken a good step by seeking information.
Consolidating student debt as the name implies is basically having another lender buy over your existing debts and consolidate it into one single loan subject to agreed terms and conditions. You may decide to refinance your private loans and keep your federal loan in order to benefit from the perks that go with it like deferment plans and loan forgiveness opportunities. In your own situation, the main consideration for debt consolidation would be to lower your monthly payments and pay them off as soon as possible.
The starting point is your eligibility. This includes the loan amount. You need to have an outstanding loan of $5,000 or above to be eligible. Some lenders have credit score requirements e.g. 680 and above. You need a good credit score to get a good rate. Your college has to be among the lender’s list of accredited colleges. Some lenders have minimum debt-to-income ratio requirements.
Assuming you qualify, you can proceed to shop for a reputable lender. There are many factors you need to put into consideration. Besides an attractive lower rate, you need to read and understand the small print by asking the right questions.
What will your term be?
Find out how long you have to pay off the loans, monthly payments, etc. You are aiming for a shorter term than your current loans if you want to take an aggressive approach, but it is common to extend the term further to make payments easier. Find out the lifetime cost – how much it will eventually cost you to liquidate the loan. Lower monthly payments may end up costing you more overall.
Is the interest rate fixed or variable?
You are better off with a fixed rate in a low-interest rate scenario. Variable rates are tempting especially when interest rates are low. Future rate increases as we are witnessing can create a scenario you did not foresee. If you go for a variable rate, ask if it is capped at a certain percentage, to enable you to make an informed decision.
What fees are involved?
Are there origination fees? Some lenders charge no fee. Are there penalties for paying off the loan before the agreed term? You want to have the flexibility of paying off the loan early if your financial situation improves, without incurring penalties.
Are there any special benefits associated with the lender?
Some lenders offer perks like job search, commission for referrals, outstanding customer service, etc.
With your key objectives of lower monthly payments, shorter terms, and zero or minimal fees, you have to crunch the numbers to determine if your key objectives have been met. If the answer is yes, then you are better off refinancing. At the end of the day, it takes quite a bit of understanding when it comes to making a decision.
Benefits of Consolidating Student Debt
Consolidating student debt has several benefits, which include:
Lower interest rate and monthly payments
You can lower your interest rate, which results in lower monthly payments by consolidating your student debt. This gives you more breathing space to pursue important financial goals like paying yourself first – saving and investing before spending. It also helps you build an emergency fund in the process. It may also allow you to pay off your loans faster.
You need to be sure you end up paying less throughout the entire lifetime of your loan.
Some consolidation plans offer flexible repayment terms. This includes plans that base your monthly payments on your current income and allows you to gradually increase your monthly payment as your income grows so as to liquidate the loan faster.
Changing from variable to fixed rate
Consolidating your student debt gives you an opportunity to switch from a variable interest rate loan to a fixed rate loan which can work out better for you when rates are low and trending up.
Releasing a co-signer
Consolidating student debt also provides an opportunity to release a co-signer. You took the loans as a student without a steady income hence you needed a co-signer to guarantee the loan. As a worker with a steady income, your co-signer may want to be released from further risk on your loans. Even when they do not request it, it is the right thing to do whenever the opportunity presents itself like in this instance.
Disadvantages of Consolidating Student Debt
As with the benefits of consolidating student debt, there are also some disadvantages. This includes;
You may end up paying more
Lower monthly payments may end up costing you more overall. There are ways to manage that. If you are suffocating presently under the weight of your loans, breathing space is valuable so as to plan better and increase the payment as your income improves. There are also situations in which you end up with lower payments and shorter terms due to lower rates. It depends on your doing your due diligence.
You could forgo other repayment options
Your current lender may offer deferments, grace periods, and flexible payment terms which your new lender may not. You need to investigate thoroughly. It is usually recommended that you hold your federal loans till liquidation due to the numerous perks that go with it as mentioned earlier.
Beware of scams
There are predatory lenders that prey on the weak – folks in deep financial difficulties. If it sounds too good to be true, it often is. Investigate before you jump. Conduct your due diligence. Watch out for red flags like processing fees, administrative fees, total debt elimination, etc. To be better informed is to be better armed.
Should you consider consolidating student debt before interest rates rise?
It is your decision to make after having done your due diligence. If all the right boxes are checked, you are good to go.
