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Guide to Private Student Loans and Consolidation

Michael Lux Blog, Consolidation, Student Loans 3 Comments

The sheer volume of companies that will consolidate or help with your student loans can be daunting.  The purpose of this guide is not to tell you which is the best, but instead it is to help you find the best institution for you.  Loan consolidation can be tricky, complicated, and overwhelming.  If you follow these five steps, you will give yourself the best shot at finding a good deal.

Reminder: This article applies only to private loans.  Federal loans (which are usually superior) have much different rules.

Step 1: Get your credit in order

Interest rates for private loans and private loan consolidation will vary based upon your credit score.  If you take a few moments to correct any errors on your credit report you could save thousands or turn a loan application from a rejection to an acceptance.

Step 2: Talk to your co-signer

If you have bad credit or no credit history you will definitely want to have a co-signer.  Without a qualified co-signer, odds are your application will get rejected.

When you talk to your cosigner, be sure to tell them exactly what you are asking them to do.  The last thing you want is for a student loan to drive a wedge in between you and a loved one.

[The Student Loan Sherpa guide to finding a co-signer for your student loans]

Your co-signer will also want to get their credit in order.  Thinks like checking for errors and paying down credit card balances can make a huge difference in any major loan.

Step 3: Do lots of research

If you are here, you are headed in the right direction.  Researching before you begin contacting lenders is definitely the way to go.  Simply doing business with the first company that comes your way could be a huge mistake.

At the very least, look in great detail at five to ten companies.  Read over their webiste, call and ask questions, READ REVIEWS.  Learn what actual customers think about these guys.  You may see some bitter reviews, but you want to go into this with your eyes wide open.

Step 4: Know what to look for

Talk to people who have done it before.  Get in contact with your financial aid office.  IF you have a local banker who you trust, talk with them.

Here are a few terms and conditions to be on the lookout for:

Interest Rate – Duh!  This is the obvious one, but it is critical.  Understand exactly how the interest rate works.  Can you lock in a fixed rate?  Is variable rate your only choice?  How are the variable rates calculated?

Co-signer Release – This is the one term that your co-signer will care the most about.  Does your lender offer a release?  What does the borrower have to do to qualify?  How often do they receive release applications?  What percentage are approved?  Is the program a term of the contract or could it end at any moment?  This is a subject you and your co-signer will want to ask many questions about.

Origination Fees – An origination fee is a charge added to the value of your loan from day one.  For example: You borrow $10,000 with a 2% origination fee.  In that case you will be billed and charged interest on a $10,200 loan.  Be sure to factor in any origination fee when you do the math to compare student loans.

Prepayment Penalties – You really want to avoid any sort of prepayment penalties.  Obviously the sooner you can pay off your loan the better.  You do not want to be committed to paying interest if you don’t have to.  Any loan with a prepayment penalty should be avoided.

Billing/Customer Support – This may sound inconsequential but it can be very important.  Some lenders have a reputation for being terrible to work with.  Late fees can stack up and it makes for a miserable experience.  You are going to owe a lot of money to whoever you pick, so be sure to pick someone you will be comfortable to work with.

Forgiveness/Forbearance/Deferment Programs – Private loans are almost never forgiven.  Their forbearance and deferment programs are notoriously bad.  (This is one of the reasons that federal loans are better than private loans).  What happens if you are unemployed or get sick and can’t cover all of your bills?  Some lenders have programs that can lower your interest rate for a short period of time.

What is your lenders reputation for working with people?  Nobody wants to think about Plan B, but you want to investigate this stuff before you sign so that you don’t have any unpleasant surprises in the future.

What happens if something happens to you?  What if you become temporarily or permanently disabled?  How will that affect you co-signer?  It is terrible to think about, but what happens if you die?  Will your cosigner start getting your bills?  Most lenders won’t do this, but some will.

It is critical to read the fine print for these programs.

Personal loans vs. Student loans

With some lenders you can get a personal loan to pay off your student loans.  Normally personal loans will have a slightly higher interest rate, but the bankruptcy protection is far better than it would be for student loans.

Final Step: Do the math and use your best judgment

When it comes to these loans there is a TON of money changing hands.  As a result it is hard to know who is the best and hard to know where to find the most accurate information.  Consult lots of resources and try to get the full picture.  Calculate how much your loan would cost in a range of different personal situations.

You would never just go to the car lot and bye the car a salesman says is best.  Major transactions like this get research first.  Student loans can be for more money and be just as complicated as a car purchase.  There is no shortcut to making a smart decision.  Just roll up your sleeves and give it your best.  Your will be glad you did.  If you run into questions or have problems, I’m happy to help, and there are many other great sources of information.


  • Student Debt Survivor

    Guide to private loans: don’t take them out! Good tips here for folks who “have” to take out private loans for some reason. Although I’d strongly recommend against going to a school that’s so expensive you have to take out private loans.

  • Stapler Confessions

    Great input. I know some of my fellow students didn’t even compare interest rates when applying for private loans. In the end, it makes a big difference!

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