Beware of the student loan consolidation temptation

By Jan Miller

For the Deseret News

Published: Thursday, April 11 2013 9:10 a.m. MDT

In this Oct. 6, 2011, file photo, Gan Golan, of Los Angeles, dressed as the "Master of Degrees," holds a ball and chain representing his college loan debt, during Occupy DC activities in Washington. With college enrollment growing, student debt has stretched to a record number of U.S. households.

Jacquelyn Martin, AP

Enlarge photo»

Editors note: This is part one in a three part series of how to correctly consolidate student loans.

SALT LAKE CITY — Student loan consolidation is being offered as the quick and easy solution to all student debt-related problems. However, before anyone consolidates, they need to make sure that they truly understand the financial impact of what they're getting into.

The consolidation nation?

There are numerous companies (some of them of questionable credentials) offering federal student loan consolidation, private loan consolidation and even overall debt consolidation as the one-size-fits-all fix to every debtor’s worries.

Granted, consolidating your loans can be a quick fix to a number of complicated problems, especially when it comes to student loans. This act can quickly transform your student debt from a confusing mess of loans with multiple lenders, interest rates and loan types into one big loan with one interest rate and one monthly payment.

However, before anyone considers consolidating any kind of debt, they need to know what they are getting into. Consolidation can produce excellent benefits on the right candidate’s financial portfolio, but it can also wreak long-term havoc on the wrong candidate’s financial portfolio, as well.

What exactly is consolidation?

Student loan consolidation can mean one of three different things.

  • Federal student loan consolidation
  • Private student loan consolidation
  • Consolidation of various forms of debt, including your mortgage, car lien and credit card debt
If you’re considering any of these three types of consolidation, read on to discover a few key factors you ought to take into account, prior to taking action on your federal student loan debt portfolio.

Federal student loan consolidation

Federal student loan consolidation is the result of combining federal student loans into a single loan. This includes but isn’t limited to FFELP loans, direct loans, Perkins loans, nursing student loans, federal insured student loans and health professions student loans.

When considering federal student loan consolidation, there are three main points that few people know about, or that student loan lenders will take the time to explain to you:

1. Your interest rate may be rounded up. When you consolidate your federal loans, you will receive one rate for the entire loan, which is calculated on a weighted average of your loans, combined.

Also, your new federal consolidation loan will accrue interest at about the same rate as your loans did, in total, before they were consolidated.

As a result, there are simply no interest rate advantages to consolidating. In fact, the figure may be rounded up slightly, which will result in a higher interest rate. For example, two federal student loans with interest rates at 2.39 percent will consolidate at 2.5 percent.

2. You will miss out on payment targeting. When you have many differing loans with different lenders, you likely have different interest rates as well. Having these loans separate allows you the freedom to send greater amounts of money to the higher rate loans. This will help you pay down your debt faster, and result in a reduced amount of interest paid over the life of the loans.

If you consolidate your federal loans, you can no longer take advantage of this and other helpful federal repayment strategies.

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