Consolidating Student Loans Can Be Tricky

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The Loan Arrangers: Consolidating Student Loans Can Be Tricky
By Brian O'Connell

If you’re stuck paying down student loans, and need to catch your breath, a loan consolidation may be in the cards. But before you sign on the dotted line, you’ll have to weight the pros and cons first.

No doubt, plenty of student loan borrowers can make a case for consolidating their loans. According to The College Board, between 2000–2001 and 2006–07, an estimated 60% of bachelor’s degree recipients borrowed to fund their education. The College Board also reports that the average debt per student loan borrower average increased 18%, to $22,700 in 2007 from $19,300 in 2001.

Simultaneously, younger American’s reliance on credit cards has exacerbated the problem of heavier student loan debt. Sallie Mae reports that, in 2008, 84% of undergraduates had at least one credit card. That’s up from 76% in 2004. In that time, the average number of cards has increased to 4.6, and half of college students had four or more cards. Plus, the average credit card balance for college students has grown to $3,173, according to Sallie Mae.

So it’s no surprise that student loan defaults are at 6.7% this year, up from 5.2% in 2008, according to the U.S. Department of Education.

That’s where a student loan consolidation can help. Besides bundling all of your different student loan payments into one simple payment, student loan consolidations can often . . .

Cut your monthly payments (by lowering your interest rate).
Come with fixed-term deals, meaning there won’t be any rate surprises, as is often the case with variable rate loans.
Not include any hefty management fees, prepayment restrictions or credit checks with a loan consolidation.

Some loan deals even come with cash-back incentives and lower interest rates, if you agree to manage and pay your account bills online (it saves banks from hiring more staff).

But if you look . . . really look . . . at the fine print on a student loan consolidation deal, things don’t look as rosy.

Higher costs. First, with a consolidation, all you’re really doing is extending the life of the loan (by adding more years to the repayment schedule). That means the total cost of the loan could be significantly higher.
No deferment. Once you consolidate your student loans, you may lose your right to a student loan deferment – a nice option if you can’t pay your bills down the road.
Rate risk. Then there’s always the risk of not getting a better interest rate on your loan consolidation (there’s no “built-in” guarantee that you’ll get a better interest rate if you consolidate.
If you do pursue a student loan consolidation, make sure to ask for all the perks you can get. For example, if you make all of your monthly payments on time for a period of three years or so, most banks will lop 1% off of your loan’s interest rates.

That’s the kind of break you can get with your loan – but, like most cases with banks, you’ll probably have to ask for it first.