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How wise is consolidating student loans?

By Jan Miller

For the Deseret News

Published: Tuesday, June 25 2013 11:15 a.m. MDT

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.

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This is part two in a three part series of how to consolidate student loans. Part one can be read here.

ASHLAND, Ore. — Student loan consolidation is being offered as a 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 a 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.

Private student loan consolidation

Private student loan consolidation is the result of combining several private loans into a single loan. Private loans come from organizations like Chase, Wells Fargo and others, and generally cannot be consolidated together with federal loans (and vice versa).

If you’re considering consolidating your private student loans, consider the following three points before moving forward.

1. Applying for private student loan consolidation is just like applying for a new loan through a bank. Although the bank may take into account that you are paying off other debt, it will still consider factors such as your credit score and income-to-debt ratio when determining whether or not you qualify for the consolidation, and what interest rate it will be offering you.

2. Private student loans are usually only suitable for parent co-signers. The reason for this is simply because parents often make substantial amounts of money, and have good enough credit to make loan consolidation worth their while. Most student borrowers don't have the income and/or creditworthiness to qualify for a lower rate.

3. The interest rate they offer you will likely be a "range.” In other words, they won't commit to an exact rate offer until you commit to the loan. Sometimes the offer ranges 3 percent or more. For example, a typical offer for a borrower who has a credit score in the mid-700s with a six-figure income is about 4 percent to 7 percent.

Still, you won't find out your actual interest rate until you complete the consolidation. Generally speaking, those who fall under this category already have low rates on their private loans.

If you are in fact considering consolidating your private loans, there are a few lenders that specialize in this type of loan consolidation. A good list of options can be found here.

Conclusion

Once you are apprised of all the above information, you may decide not to rush into consolidation … or perhaps, you might be more motivated to do it than ever.

No matter what type of student loan consolidation you consider, understanding your options and the impact that consolidation will have on your loans is crucial when trying to make the best decisions for your financial future.

Consolidation, whether it’s federal, private or overall debt, is not a quick-fix solution that meets everyone’s needs. Make sure you speak with a trusted professional who can guide you to the best possible decision with regards to repaying your federal student loans.

Jan Miller is a 15-year student loan and financial industry veteran. He's an independent student loan consultant who crafts customized student loan repayment plans. EMAIL:info@student-loan-consultant.com

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