A business degree, even an MBA, is by no means a guarantee for success. That being said, many recent business school grads do find themselves with great incomes and career prospects. One such grad sent us an email asking for help regarding his student loan repayment options. As someone with six figures of student loan debt, but also a six figure income, he was weighing the pros and cons of different consolidation options. He noted that, “I understand that no job is certain and really value the federal protections, but I believe I can snag another job within a short period of time (between 1 – 3 months) if I really needed to do so.” Ultimately, he had two questions. First, should he consolidate on the private market? Second, does federal consolidation lower the interest rates on the loans?
Should I Consolidate on the Private Market?
Private student loan consolidation is a high risk-high reward endeavor. The high reward is significantly lower interest rates, and an enormous savings over the life of the loan. Many private lenders advertise that an average borrower saves well over 10k, by consolidating with them. The high risk comes if you find yourself with low income or no job at all. The private lenders have far less options than the federal government provides when it comes to repayment on little or no income.
In many ways, the consolidation question can be looked at as a job security question. If you have a great income and high job security, the risk is much lower. Like our reader noted, job security isn’t just a question of how secure you are in your current position; true job security means that you can leave your current position and find similar work at a similar pay in a relatively short period of time.
Deciding whether or not to consolidate with a private lender can be reduced to a relatively simple equation. First, calculate the total cost of repayment if you stick with the federal government at your current interest rates. Second, find out the rates that you qualify for with a private lender, and calculate the cost of repayment if you refinance on the private market. If the federal loan costs less than your private options, it is a no brainer; you keep your loans with the federal government. If the private loan is less, then it is an insurance policy question. The extra money that it would cost to keep your loans with the federal government is the cost of an insurance policy that protects you from defaulting on your student debt should you drop in income or lose your job. If your savings could be huge and you have great job security, you have your answer. Where the beak even point is depends upon your aversion to risk.
Simple equations aside, there are other factors that may also enter into your decision. For example, as we noted in our review of SoFi, they provide job placement services for their borrowers. Obviously, it isn’t the same as the federal perks, but it is another resource at your disposal should the time come for a new job.
Can I get the federal government to lower my interest rates by consolidating with them?
This would be the ideal solution. Leverage your high income and credit score to get lower rates with the federal governments. Unfortunately, it doesn’t work that way.
Federal credit decisions are done on a yes or no basis. Your credit score and income have no bearing on the internet rates you are assigned. Those rates are actually determined by Congress, and they do change from year to year.
When you consolidate with the Federal government, the interest rate you receive is based upon the existing interest rate on your loans. To determine your rate, they take the weighted average of all the loans that go into the consolidated loan. There is an element of convenience to having to deal with just one federal loan servicer on your federal loans, but the downside is that there is no way to realize any savings by quickly paying off your highest interest rate loans first. It just becomes one big loan that must be paid off.
The Next Steps
If you are considering private student loan consolidation, don’t use the lowest advertised rates for making your decision. Those rates normally apply to short-term variable-rate loans. Most people prefer a long-term fixed-rate loan. The interest rate on these loans will be a little higher, but can still offer a significant savings over the federal rates.
The best bet is to apply with several private student loan consolidation companies. Be sure to apply to all of them within a short period of time so that the credit agencies consider it “shopping around” as opposed to many credit applications. This period of time is supposed to be 30 days, but doing all of your applications within a week or to can ensure that there are no issues.
Once you know the score that you qualify for, do the math and weigh your options. There is no simple answer, but if you consider all of the relevant factors and how they apply to your individual situation, you can make a well informed decision.