Student loan consolidation has many advantages. Consolidating your debt can lower your payments, lower your interest rate, and even improve your credit score. However, not all student loan consolidation is created equal, and if you are not careful, you can get burned.
Here are some tips to keep in mind if you are thinking about consolidating your loans:
Be wary of student loan consolidation companies. Some of these companies will have you sign a power of attorney to handle your loans for you. This is a big mistake. They can use this authority to change all your passwords, delete user names, and make it impossible for you to pay off your student loans without their assistance. Then they charge you an up front fee as well as a percentage of your payments. Check out this description from a former employee.
Never combine your federal loans with your private loans. This is pretty much rule number one of student loan consolidation. Federal loans come with special benefits like forgiveness programs and special repayment plans. If you combine a federal loan with a private loan, you lose the many perks of the federal loan. This is a major no-no. Reputable consolidation companies will not even conduct this sort of transaction. The ONLY reason one might consider combining a private loan with a federal loan is if they knew for certain that they would be able to easily pay off the loans and could get a lower interest rate by doing it this way. Even then, it is a risky move.
Consolidate your federal loans with the federal government. Sadly, many shady companies are popping up out of the woodwork offering to consolidate your federal loans. All they are doing is taking a free service offered by the government and charging you for it. Last week, I discussed one of these companies and how to consolidate your loans the right way – the free way.
Your lender may warn you not to consolidate your loans – don’t listen. One mistake that people often make is that they rely upon the “advice” of their student loan servicer. It is very important to remember that they are in business to make money, not to be your financial planner. Learn the rules of the game from them, but don’t rely on their wisdom. A classic example happens when you consolidate your student loans. Sallie Mae has been know to call people with federal loans and warn them about the “consequences” of loan consolidation. Essentially, they try and scare you out of it. Why? They make money servicing your federal loans. If your loans are consolidated, they may end up with another servicer and Sallie Mae no longer makes money on the loan. They want to avoid this. You shouldn’t care.
Consolidation of federal loans is essential for some. I fell into this category. Certain federal loans do not qualify for programs such as public service forgiveness. An example would be a graduate plus loan. However, these loans are eligible for consolidation, and the consolidated loan is eligible for public service forgiveness. Therefore, if you think there is any chance you will be seeking any form of loan forgiveness, call your lender to see if all your loans qualify in their current condition. If they do not, ask if consolidating your loan will make them eligible. It is absurd that it works this way, but these are the rules of the game as it currently stands.
NOTE: While it is essential for some to consolidate, some loans are not eligible for federal loan forgiveness programs, and those should not be included in your federal student loan consolidation. Before you consolidate, check and double check to make sure the right loans are being bundled together.
If you consolidate your federal loans and end up with two loans instead of one – don’t panic. The federal government actually does this intentionally. They will keep your subsidized loans separate from your unsubsidized loans. This little distinction is really of no consequence to you. The only times it comes into play is when you are being really smart and paying extra on your student loans. If you do pay extra, make sure your lender applies it towards the balance of your unsubsidized loan.
If you always keep these six tips on your mind as you go through the consolidation process, you can make sure that you are not paying anything more than necessary to your lender or the government.
Readers: Have you consolidated? Do you have any tips or pointers from your consolidation experience?