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Why You Shouldn’t Consolidate That Student Loan

As the lucky recipient of several student loans, I was extremely intrigued when I saw the article,10 Questions to Ask Before Refinancing Your Student Loan. Yet as I read through, I noticed there was critical information missing: information that could cost you more money than you want to lose (which if you are like me – you don’t want to lose any money). You see, everyone is trying to cash in on the student loan debt epidemic and that “cha-ching” is at the expense of us, students.

Through my work, I get to talk to people dealing with all types of debt, and I have personally seen the fall out that can come from making quick decisions without enough information. There are real cons to consolidating or refinancing your federally backed student loan debt with a private lender. That is what the writers of the above article failed to mention.

When I graduated college, I owed just over $56,000. That amount was split between different loan servicers and my interest rates were just as scattered. Some were really low (3%) and some were mid-range (6 – 7%). I wanted a way to consolidate my debt, have one payment, and start knocking out the debt. I used a consolidation loan, but one through the federal government - not a private lender. The reasons below outline why.

When your accounts are still with the Department of Education, you have more payment options available than you would through a private lender. Have you ever heard of a private lender saying, “Okay, we’ll put your account into forbearance and you will not have to make a payment for one year?” No.

Of course, forbearance is only one, expensive option. While you are not paying your loan, interest is accruing and being added to the loan. There are numerous repayment options available, though and some include the option of debt forgiveness after a certain number of payments and years.

Another con to refinancing a student loan into a private loan is the possible loss of the ability to have a loan forgiven or discharged. The U.S. Department of Education has an entire section devoted to understanding student loan repayment options. If you are struggling to make payments or are curious what your options are, go there before making any decisions.

I understand taking advantage of lower interest rates, but as a credit counselor, I also see the value in having an emergency plan. Right now, your finances may be in great shape and it is hard to fathom needing to skip or reduce payments. But life happens. If you want to get out of student loan debt sooner rather than later – work on making larger payments. Every extra dollar you send is applied to the principal you borrowed.

For example:

  • You borrow $20,000 in student loans. Interest rate is 6.8% Standard repayment plan $230.16.
    • Time to pay off 10 years. Total paid $27,619.20
  • Same scenario, but make payments of $280.16 ($50 more).
    • Time to pay off 7.6 years. Total paid is $25,774.72.
  • By adding $50 a month, you save $1,844.48 and reduce payment time by 2 years and 4 months!

The most important gift we can give ourselves when it comes to our finances is knowledge. Take the time to fully investigate options and ask questions. Remember, it’s your money and if it sounds too good to be true, it probably is! 

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American Financial Solutions (AFS) is a non-profit 501(c) (3) financial education and credit counseling agency that helps people find solutions for managing their money and changing their financial lives for the better. Since 1999, AFS has helped over 750,000 individuals across the United States through one-on-one counseling, financial education classes, or the use of debt management plans. AFS is a member of the National Foundation for Credit Counseling (NFCC) as well as the Association for Independent Consumer Credit Counseling Agencies (AICCCA). AFS is also accredited by the Council on Accreditation (COA) and has an A+ rating by the Better Business Bureau. For more information, please visit our website. Find us and like us on Facebook or follow us on Twitter

Published Oct 21, 2014.