Navigating the Consolidation Frenzy

For most ex-college students, student loans are a fact of life. Personally, I graduated with the joy of knowing that I had 3 student loans. Together they totaled close to 35,000 dollars. Monthly, I was spending close to 300 monthly on my loans and opted for a graduated plan when I consolidated at 5.5% about 5 years ago once I got out of school.

What you might not know

Not all student loans can be consolidated. Some student loans are federally subsidized and some are not. When meeting with the financial aid office, it is not really clear always what that means. But consolidation is where it comes into play.

Student loans that are federal loans can be consolidated under the Federal consolidation program. This means that they can generally be combined to provide a single payment and the interest rate is generally lower. Furthermore, the interest on these loans is tax deductible.

Be careful when consolidating though, it is very very common for loan terms to be stretched for long periods of time. In fact, my consolidation was done for a 20 year term. This is done usually without you being aware of how long it would take to pay it off. (see other article)

*However, this will cost large amounts of interest.

*If you are able to, and have no other high-interest debt, you might consider paying down the principal. Personally, my consolidated loan is going to be my second-to-last target for principal paydowns. Here’s
why:

1. For me, the interest is 100% tax-deductible. And since I itemize, I get the full benefit.
2. I have other higher interest debt.
3. I have other debt with non tax-deductible interest.
4. I have not deferred or done anything with this debt. Therefore, I can likely manage this debt more easily in the case of an emergency like a layoff. This would be an easy way to reduce my financial obligation for a short period of time. This would likely be difficult with other loans/lenders.

What do I do with non-federal loans then?

This has been the big question on my mind over the past few weeks. Since I have a good history with this lender by paying on-time for the past two years, I have gotten a .25% interest rate credit. However, the rate is still high.

When I referred to my own advice, none of them really panned out for me. The loan is too large to pay off in a short period of time, and loans that I have been trying to get from other lenders are too large. This surprised me because I knew that members of my family had gotten personal loans before.

I contacted Sallie Mae to see if there was any option there, but they confirmed last night that the best possible rate I might get is close to 9%. The only other options that I see at this point are to get a loan from a credit union somehow or do something that is really really drastic: transfer the balance to a 0% credit card. The third option is to do nothing.

1. The credit union option is nice, but will take a long time to build a good relationship there that might yield a decent rate.

2. The credit card transfer is scary because the card could easily require a high minimum payment and this would result in a repayment plan that might well be unmanageable. Furthermore, unless your rate is locked in, credit cards can change your rate without even needing a reason. And even if they don’t pull any dirty tricks, a single late payment could put me over the edge by spiking my rate and filling the card up with fees. But I have to say, it is tempting. The total savings comes in at close to 1500 dollars in interest.

Right now for me, the question is, am I certain that I can cover all of my bills with no problems for the next 5 years while I pay off the credit card during multiple balance transfers etc. ? Since my personal answer is no, I’ve left my situation alone, although I might do a partial transfer at least, just to negate some of the interest.