debt

Can student loan debt be consolidated?

Steve BucciQuestionDear Debt Adviser,
Student loan rates for borrowing are at an all-time low. Is there a company that will refinance student loan debt at a fixed rate? We have not missed a payment in three years, but I'm fearful that future rate bumps will send the interest through the roof.
-- Jane

AnswerDear Jane,
Consolidating student loan debt was very common before the 2008 financial crisis. Since then, we have been in a pretty tight credit market with fewer options for consolidating. However, things are beginning to loosen up a bit -- especially for those with excellent to good credit ratings.

You are wise to plan ahead to ensure you're not in danger of defaulting on your student loan. Because you have a variable-rate loan, you more than likely have private student loans as opposed to federal loans. However, if you have one of the older variable-rate federal loans, you can consolidate and lock in a fixed rate. To find out more, contact the Federal Direct Consolidation Loans center at (800) 557-7392. The Direct Consolidation Loans website has more information and a calculator you can use to find out how much you'll pay each month if you consolidate.

Private loans are fussy. The changes these lenders can make to your loan agreement are staggering. Reasons to consider you in default do not have to be tied to your payment history, interest rates can be raised and excessive fees may be charged. Plus, there is no regulatory limit on interest rates for private student loans. And if your credit rating slides enough, your rates can be raised just like in the bad old days of credit card universal default. Because they are protected by rules that make them virtually nondischargeable in bankruptcy and have very onerous collection options -- like taking your tax refunds or Social Security payments, or voiding your license to practice in some professions -- you don't want to mess with these bad boys.

Consolidating your current loans into one fixed-rate loan with a monthly payment that you feel you can afford is a good idea. What you want to be aware of, however, is extending your loan for too many years. A consolidation loan product, even with a low interest rate, that is payable over 25 years will probably cost you a bundle in interest charges, though it may help you avoid a default.

Let one of your current lenders know that you are interested in a fixed-rate loan and the amount that you would need to consolidate. Next, check with your bank or credit union and find out what options they have for you. If you can consolidate into a type of loan other than a student loan, I would recommend it if the interest rate is comparable and you can get the payment you need. Be sure to comparison shop for the best deal with the best terms, as they may vary a lot. If your credit is less than stellar or you have what is called a thin file -- one with little data and therefore hard to score -- take some time to improve it. This will help you qualify for the best options down the road. It is hoped that the credit market will loosen up some more and you can get those loans consolidated in the very near future.

I have one last suggestion for you. Rather than go the slow route and stretch out your payments and your risk from carrying all that debt, I encourage you to look into paying off the loans as quickly as possible. The sooner you get rid of these loans the better. The unwarranted, unfair protections the lenders have if anything causes you to default, like losing your job or becoming disabled, cause me great concern. In addition, if you have a co-signer on the account, the same concerns apply -- and if you die, they still have to pay the bill.

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