Overcoming Consolidation Roadblocks

Michael Lux Blog, Consolidation, Mailbag, Student Loans 0 Comments

In a recent email, a reader fresh off of a student loan consolidation rejection, asked some important questions:


I currently make $53,000 plus a bonus of $7000 and I have a solid credit score of 765. I have roughly $50,000 worth of debt, $25,000 of which is private loans with rates north of 7.5% and the rest is federal loans at a rate of 5.5%. I applied at SOFI and DRB but was denied at both. I was extremely disappointed because of the hard hit on my credit. DRB also informed me that in order to qualify, one must have an income of $3000/month after ALL other expenses. This just seemed outrageous to me. I have the following questions….

Should I even be considering consolidating both my federal and private loans together?

Is a co-signer inevitable?

What is your suggestion for the length of the consolidated loan? My current loans are all over the board at 5,10, and 15 years.

Thanks for your help!


Before we get into Tom’s specific questions, a brief overview of the SoFi and DRB business model is probably in order.  As we noted in our SoFi review, these two companies offer eye-popping low interest rates, but are very selective in who they lend to.  In order to offer such low rates, they have to be sure that their default rate is extremely low.  What they are essentially doing is poaching the cream of the crop from the federal government’s student loan portfolio.

When the federal government issues student loans, interest rates are not based upon your credit history or income.  Because a number of these borrowers will inevitably default, the rates have to be at a high enough level to cover this risk.

SoFi, DRB and others are identifying the extremely low risk federal (and to a certain extent, private) borrowers and offering interest rates that are currently under 2%.

The point behind this little business lesson is two-fold.  First it is to help you identify the reasoning behind your rejection and to help you make a realistic assessment about your odds of future success.  Secondly, it is to point out that not all lenders operate on this business model.  You may not be able to get a loan under 2%, but that doesn’t mean you can’t improve on 7.5% or even 5.5%.

One example that comes to mind is LendKey.  This company essentially works as a matchmaker between individuals and local credit unions (you may recall that these loans were previously called cuStudent Loans).  By the nature of their business, and by working with local customers, they can normally accept a loan that might be too “risky” for a company like SoFi or DRB.  For a consumer that means higher acceptance rates.

As for your more detailed questions…

Should I even consider combining federal and private loans?

Here at the Student Loan Sherpa, we normally advise against this combination, expect for very specific circumstances.  The reasoning is pretty simple: if you use private consolidation, you lose federal perks.  Making things more complicated is the fact that there is no way to “undo” the consolidation.  Once it is done, you must live with the consequences.

That all being said, you should absolutely consider it.  Just because it is a mistake in some cases doesn’t mean it is always a bad idea.  The fact that you are even asking this question implies an understanding of the consequences of the decision.  If you go into the decision with eyes wide open, and it makes sense in your specific situation, there is nothing wrong with doing it.

Is a cosigner inevitable?

The answer to this question is definitely a no.  Like the private loan consolidation of federal loans, it is an option, but certainly not a good idea in many circumstances.

The problem with cosigning a loan is that many cosigners don’t understand the implications of their decision.  Even if things go perfectly and the borrower never misses a payment, it still can be a huge financial burden on the cosigner.  If the borrower struggles to pay back the debt, things get really ugly.

Depending upon your circumstances, it could make more sense to keep a slightly higher interest rate to avoid the many issues that come with getting a cosigner.

What is the best length of repayment?

This is a question where the answer depends greatly upon your personal preferences, such as aversion to risk, and your individual finances.

The decision really comes down to a question of low monthly payments vs. low interest.  If you can comfortably/easily afford the higher monthly payments on a shorter loan, grab the better interest rate.

Even though selecting the 15 or 20 year repayment plan will result in a higher interest rate and more money spent over the life of the loan, it is still a good alternative for many.  For starters, because the monthly payment is lower, your odds of approval are actually better.

Another benefit of the long loan is the flexibility.  Because there are no pre-payment penalties on the loans (if there are, run… any student loan with prepayment penalties is a terrible idea), it is often a good idea to attack the loan with any money you have to get it paid off as soon as possible.  As you repay the loan, you can make payments large enough to pay it off in 5 or 10 years, but if finances get tight, you have the security of the lower minimum payment.

Think of the higher interest rate as the cost of the security blanket.  If the flexibility is worth paying a little extra each month, then you have your answer.

Going Forward

Trying to get lower interest rates on your student loans is a great way to save money in the short-term and in the long-term.  If you’ve been rejected for consolidation, we have a number of tips to turn your rejection into an approval.  Now is the time to continue to collect more information and to get your financial ducks in a row.

Applications are not a huge hit on your credit score, but they can drop it.  The trick is to apply to a number of places within a short window.  Going this route will ensure that the credit agencies call it “shopping around” so that it effectively counts as just one inquiry.

A rejection is a setback, but the no is not a permanent status.  A few tweaks to your credit profile or casting a wider net in your applications could be the key to lower interest rates and making your student loans history.  If you don’t know where to start, our list of student loan consolidation companies and reviews can help you get on your way.