Private Student Loan Consolidation
Consolidating private student loans is a bit like a financial spring-cleaning. Instead of dealing with multiple loans, different monthly payments, and different loan servicers, consolidation combines multiple loans into one, and makes your repayment process easier. All of the money is in one place, and there’s a lot less mess and hassle to deal with. In addition to providing ease and organization, private student loan consolidation can also give a borrower a bit of a financial windfall, especially if that borrower meets a certain set of requirements.
A Few Definitions
Private student loans for college aren’t a common choice, which makes consolidating private student loans even less common. In the 2007-2008 school year, for example, The Project on Student Debt reports that only 14 percent of students had a private loan. The rest subsidized their education through:
Those who do have private student loans likely got those loans when they had very poor credit ratings. They may have been unable to prove a steady work history or a stellar ability to pay back bills because they were either young or underemployed prior to entering school. As a result, most students who get private student loans have poor credit ratings, and that might mean that their original student loans were a little expensive.
A private bank offering a student loan can look at the going interest rate in the marketplace, as well as the reliability of the person asking for the loan. With these two pieces of information, a banker can come up with a customized interest rate that’s reasonable and in line with the marketplace. But that interest rate might be different than the rate another bank might give, and it might reflect the way the economy looks at the moment. In some cases, the loan might even be variable, so the amount of interest charged might dip and sway with time.
Students who signed up for loans years ago, when borrowing money was expensive and the market reflected that cost, might have loans that are much more expensive than a modern loan. Since their credit scores were low when they applied too, they might also be paying more for each dollar they borrow. The loan doesn’t take into account the credit score gains they may have made in the years that followed the original application.
Private Loan Consolidation with Citizens and Charter One
Citizens Bank Federal and Private Student Loan Refinancing
- Citizens Bank customers have saved an average of $127/month
- No application, origination, or disbursement fees
- Fixed and variable rate options available
- Potential to save up to 0.50 percentage points off your interest rate with available discounts
Private student loan consolidation allows a borrower a second chance at getting a really great loan, based on current market conditions. For example, if interest rates have fallen since the original loans were borrowed, consolidation can result in a much lower interest rate. Also, if a borrower has a better credit score than when he or she first borrowed the loan, the consolidated loan could have a lower interest rate. Consolidating in those situations can allow a borrower to reduce the interest rate and their monthly payment.Bloomberg reports that only about 12 banks offer these consolidation loans, and that those people who want them often need to demonstrate a sterling financial profile with no blemishes at all. Many potential borrowers are required to get a cosigner for the loans, or they won’t qualify for the lowest rates. Even then, these loans can sometimes be a little expensive, and they can come with hidden fees due to:
- Origination charges
- Variable interest rates
- Acceleration rates due to missed payments
- Lack of deferment options, even when the borrower is sick or unemployed
It’s easy to blame the banks for these charges, but as an article produced by The New York Times points out, tough accounting rules that these financial institutions must follow might make bank administrators leery of providing low cost consolidation options. The banks might also be required to charge more for these loans because they’re more expensive to create.
Even so, there are a number of students who find that consolidating their loans allows them to pay a little less each month. While consolidating loans often requires borrowers to pay more over the life of the loan, the increase in cash flow in the short term makes consolidation worthwhile. By combining at a lower rate, they might be getting a great deal that provides them with a lower amount of financial stress and distress.
Even so, there are a number of students who find that consolidating their loans allows them to pay a little less each month, and the amount they’ll be asked to pay over the life of the consolidated loan is lower than the amount they’d pay if they’d left all of their little loans in place. By combining at a lower rate, they might be getting a great deal that provides them with a lower amount of financial stress and distress.
Things to Remember
Generally, you can’t consolidate federal and private loans together into one loan. Federal loans can be deferred or forgiven completely, depending on a borrower’s financial standing and employment status. Depending on your financial situation, you may be eligible to defer your federal loans, so keep that in mind when considering your consolidation options.
Additionally, private student loan consolidation is the sort of thing a borrower can only do once. There are fees involved and credit checks to pass, and some companies balk at borrowers who continue to consolidate instead of paying off their debts. Choosing when to consolidate can be tricky, as you want to hit at a moment when the interest rate is low.
Reading the fine print is also a must. Borrowers should ensure that they know just how much the loan will cost them and under what circumstances that loan might become more expensive or go away altogether. Some loans have surprises that can be devastating to a family, so it pays to be cautious. One family mentioned in USA Today, for example, was forced to pay $44,500 in private student loans when the student in question had died. That kind of information is usually buried in the fine print of a loan, and it pays to read it and plan ahead.
Pulling Together Data
Since consolidating private student loans typically takes place at a bank or a credit union, there are no federal forms to fill out or confusing regulations to meet. Borrowers can simply download some simple documents regarding their credit history, and they’ll be well on their way to an application.
It’s important to identify and have documentation for all of the loans you wish to consolidate, and the consolidating bank often wants to know what the borrower’s balance is at the time, along with the interest rate of that loan. Before agreeing to think about consolidation, students should pull all of their loan documents together and contact their loan servicers for current information, if needed.
After getting a consolidation offer from a bank, borrowers should take the time to study the offer and ensure that it makes good financial sense. Sometimes, small loans should be paid off independently, allowing the student to release a little debt instead of wrapping that money into a larger pool. In other cases, it’s reasonable to include each and every loan the student has. Studying the numbers carefully and asking a financial aid advisor to do the same can help a borrower to understand the plan and make good choices.
We can also help you with your private student loan consolidation choices. Our Student loan consolidation tool can help you to understand the options available to you, and our articles about other types of student loans might help you to see a different solution you hadn’t thought of before. Please browse our site and try our free tools. We’re here to help.