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Private Student Loan Consolidation

Last week I wrote about federal loan consolidation and emphasized the importance of reviewing offers closely. There are two changes I wanted to point out: (1) Educational Loan Company – mentioned as a good baseline for comparing “medium-term” repayment offers – had required a minimum consolidation amount of $20,000; that has been reduced to $10,000. (2) The North Carolina Program, which had offered a 2% rate reduction incentive, offers incentives totaling 2% for on-time payment and an additional .25% reduction for auto payment (2.25% total rate reduction benefit available).

Contrary to popular belief, private loans can be consolidated … Here is what you should know if you have them and are considering consolidation:

  • DO NOT consolidate them with federal loans even if they provide the option.
  • They can’t be consolidated until you’re out of school and beginning repayment.
  • In most cases, consolidating private loans will leave you with a variable rate loan – it will not typically fix your loan rate [like federal consolidation].
  • Keep in mind that the best option is often to leave them alone. How to know?

1) Look at the benefits of your current lender. There are only about ten lenders that will consolidate any private loans. Most companies require that you have loans with them to be eligible to consolidate with them. The amount will vary – some will require that you have one or more loans with them – some will require 50% or more of the consolidating amount be with that lender. Researching your lender is a good start …

2) Shop around. As mentioned, there are a few companies that don’t have stipulations in order to use their consolidation/refinance program. Here’s a published list – http://finaid.org/loans/privateconsolidation.phtml. The lender, not the government, dictates the interest rates provided [most are linked to the Prime Rate or LIBOR].

Private loan are credit-based loans [as is the refinancing/consolidation process]. If you had poor credit when getting the loan initially, consolidating them may make sense if you now have better credit and/or a co-signer with good credit. The difference in rate from poor to excellent credit can be as much as 6%+ with some lenders. If you had good credit from the beginning, consolidation is not likely to provide much benefit to you. There are distinct costs to weigh in the decision. All of the criteria used to assess the ‘utility’ of the original loans should be examined when evaluating consolidation options. See my alternative loan article on the OFS website for more detailed information about ‘cost’ considerations such as fees, potential prepayment penalties, borrower benefits, etc.