STUDENT LOANS: CONSOLIDATING PRIVATE LOANS
Fixed interest rates.
That is one viable reason for consolidating private loans although you are not mulling over that option. Private loans generally carry variable interest rates. However, it cannot be consolidated with federal student loans. But if you decide to do so, not only you will secure a smaller, more manageable payments, but also the rate may not increase that much in the future.
How does private loan consolidation work?
Get in touch with your original lender and know if it is feasible to combine all your private loans into a bigger one. In case you have more than one lender, ask each bank about the likelihood of combining the loans from the institution with loans from other banks. By consolidating private loans, you can obtain better interest rates and/or remove your cosigner from the loan, which can spare your parent or relative from a potential liability.
But bear in mind that lenders cannot guarantee they will work for you in case of a financial difficulty. Find out if your lender has provisions for temporary reprieve from making payments because of an economic hardship. And if there is such provision, request for a copy of the document in written form.
Now, if you decide to consolidate your private loans, turn to Chase, NextStudent, Student Loan Network, or Wells Fargo. (For discussion purposes, we will look into Wells Fargo Private ConsolidationSM loan). Under this loan, a borrower can combine his or her loans for up to $120,000, while the lifetime limit for this loan, including all other education-related debt, is $250,000. It also has no application or origination fee, as well as penalty for paying off the loan early. Repayment period begins right after combining private loans.
There is an alternative to private loan consolidation: transferring loan balances to credit cards. While this is not the best choice, if the offer is 0% balance transfer for 12 months or 4% for the entire life of a loan, then this alternative may be worth giving a shot.
But before putting your student loan debt into a credit card, you must look at the following factors:
- Origination fee. If the balance transfer rate ranges from 3% to 5%, not to mention the length of time for repaying the loan, balance transfer is useless.
- Promotional interest rate. If your credit card offers their promotional rate but did not pay it off during the period, again, balance transfer is useless as the rate will revert to its initial rate, and it will incur interest at the non-promotional rate.
- Promotional rate and remaining balance. In case you have a balance on your card, you need to find out what is paid first, whether the promotional rate or balance. Anyhow, student loans are paid at the discounted rate, while the rest of your balance at the normal rate. Not a single penny will be placed toward the amount borrowed at the higher rate until you have settled your transfer balance, no matter how much you pay every month.
- Balance transfer and credit rating. You have to cut your balance transfer if doing so can max out your credit card. Remember, a credit card balance should not be higher than 50% of the credit limit.
One last advice: If you have important questions or clarifications about consolidating private loans, talk to your consolidator. Read the terms carefully, and have a relative or friend do the same, if possible. Since this is an almost lifetime contract, it is important to understanding the nitty-gritty of private loan consolidation.