Many student loan lenders like to sing the praises of working with one single company.
To a certain extent, these lenders are right. Having all of your loans in one place is very convenient. It means just one bill to worry about each month. If you hit a hurdle, it means just one lender to call. The convenience and efficiency of dealing with a single company is clearly a positive.
This benefit applies to both current students looking for their next loan as well as graduates who are currently in repayment and looking at refinancing, or consolidating, their current debt.
However, this convenience comes at a very high price. Borrowers who work with just one lender give up a lot.
Today we will discuss the reasons why working with just one lender can be a mistake. We will also cover the times when working with just one company might actually make sense.
Combining all loans can mean a higher interest rate
The idea behind this process is that a college graduate with a job is less of a credit risk than an employed college student. These lenders pay off the existing loans in full, and the borrower pays back the new lender at a lower interest rate and possibly lower monthly payment.
While this approach is a great way to save money, some borrowers make a critical mistake. They assume that all of their student debt must be refinanced in order to take advantage of the lower interest rates. Such a move can be a mistake.
Suppose a borrower has three loans with a balance of $10,000 each. The first loan has an interest rate of 3%, the second loan has an interest rate of 5% and the third loan has an interest rate of 7%. If the borrower is able to qualify for refinancing at 4%, they would come out ahead by combining all of the loans into a single 4% loan. However, the borrower can do even better if they only refinance the loan at 5% and the loan at 7%.
Only refinancing certain loans might mean dealing with multiple lenders, but by keeping interest rates as low as possible, a borrower can minimizing spending on interest and pay off their debt quicker. The moral of the story: when refinancing student loans, a borrower does not have to include all of their existing loans.
Only refinance the loans when you are able to improve your interest rate. The potential savings justifies the possible headache of dealing with multiple lenders.
A Note from the Sherpa:Federal student loan consolidation is a different process than refinancing with a private lender. Federal consolidation is usually done in order to gain eligibility for certain repayment plans and forgiveness programs. Those with federal loans curious about federal direct consolidation can read more here.
Borrowing from the same lender every year is lazy and expensive
Paying for college can be stressful.
The idea that you might not be able to pay for the next semester can be a very scary notion. When facing this stress, many students go directly to the lender that has provided student loans in the past. After all, if they approved you in the past, you have a good shot at approval in the future.
Once that funding is secured, the stress goes away.
The problem is that many college students stop at this point in the process. They have the money they need for school, so they don’t feel the need to do anything further.
Ending the process here is a huge mistake because shopping around can usually mean lower interest rates. Each student loan company uses a different formula for evaluating applicants. This formula can change from one year to the next and the company that offers the lowest interest rate one year may not be the best lender the next year.
Some students may stick with one lender because they believe having all of their loans with one company is somehow worth paying a bit more in interest. Without shopping around, one lenders students will never know how much extra they are actually spending. Worse yet, lenders often sell student loans to other companies. Borrowers have no influence where the debt is sold, and three loans with one company could easily become one loan with three different companies.
We encourage borrowers to shop around for at least a couple hours in order to find the best interest rates available. The potential savings could mean that the time is very well spent. The borrowers who are not willing to invest time in the process should at least consider checking rates with a company like Credible. Credible may not have all lenders on their platform, but they usually have half a dozen at any given time and this is a good way for lazy shoppers to at least do the bare minimum.
Sherpa Tip:A willingness to deal with multiple lenders is essential for all college students. Federal government loans may not cover all the borrower that a student may need, but these loans are far superior to all private loans. Federal loans have the best forgiveness programs and repayment plans. College students should almost always max out federal student loans before ever considering a private lender.
When does just one lender make sense?
Ultimately, the advantage to working with many companies is the chance to save money on interest. This is the case for graduates who refinance as well as current students looking for their next loan.
If one lender happens to have the best rate available, then a borrower should absolutely enjoy the perks of dealing with just one company. If working with more than one company can save some money, borrowers should chase the savings.
If you are on the fence, just do the math. Figure out how much extra it costs to have just one lender. Then ask yourself if ease of use is worth spending the extra money. Most student loan borrowers will find that a little bit of convenience will not outweigh hundreds or even thousands of dollars in potential savings.