The positives and negatives of consolidation loans
Although there
are an endless variety of reasons why people find themselves in over their heads with debt, the cost of education is frequently to blame. Fortunately, there are many available options for managing multiple sources of debt. One option is consolidating student debt into one loan.
Trying to figure out how to pay down debt is a stressful situation, and it can be even more stressful if you’re dealing with multiple loans. Many people feel that their financial situation would be more manageable if they only had to think about one loan and had one clear monthly payment to save for. This is possible through debt consolidation loans.
Many financial experts advise against seeking loan forbearance — the ability to reduce or even stop payments completely for up to a year — and instead advise that people begin paying down student debt as soon as possible. If you cannot make your current loan payments and do not want to seek forbearance, consolidating may be the best solution.
“Let’s say you have $80k in student loan debt right now and can’t make the monthly payment. What I’m going to do is consolidate my loan and I’m going to put them in a federal direct loan consolidation,” recommends Rick Ross from the financial advisory College Financing Group on Forbes.com.
“Consolidation can save you money,” notes Maggie McGrath, Forbes staff writer. “However, you cannot consolidate private loans with federal loans, and when you do consolidate federal loans, you may lose benefits associated with the original loan, like interest rate discounts, principal rebates or some loan cancellation benefits.”
If you’re consolidating federal loans into a federal Direct Consolidation Loan, your monthly payment could be greatly reduced because the consolidation loan can allow you up to 30 years for repayment.
“You might also have access to alternative repayment plans you would not have had before, and you’ll be able to switch your variable interest rate loans to a fixed interest rate,” states the Department of Education’s Office of Federal Student Aid. “However, if you increase the length of your repayment period, you’ll also make more payments and pay more in interest.”
It’s important to note that consolidation cannot be undone. The original loans are, in essence, paid off by the new loan. Therefore, they no longer exist and cannot be retrieved if you decide you prefer the benefits of the original loans more. This is why it’s important to carefully consider the consolidation process.
If you’re currently in default, you must meet certain criteria before consolidating. Information about that criteria and a list of the types of federal loans can be consolidated into a federal Direct Consolidation Loan can be found at http://studentaid.ed.gov/repay-loans/consolidation.
When applying to consolidate your loans, it’s important to be careful of imposters who attempt to steal personal information or scam people into paying fake fees. There is no fee charged when you apply to consolidate your federal loans.
“If you are contacted by someone offering to consolidate your loans for a fee, you are not dealing with one of the U.S. Department of Education’s (ED’s) consolidation servicers,” cautions the ED’s Office of Federal Student Aid.
If you have private loans, you will not be able to use this federal resource for consolidation. There are other methods of consolidating debt, however, such as through a home equity line of credit or a second mortgage. The obvious risk to this type of consolidation is that using your home as collateral could mean that you lose your home if you cannot make payments or even if your payments are late.
“What’s more, consolidation loans have costs,” according to the Federal Trade Commission (FTC). “In addition to interest, you may have to pay ‘points,’ with one point equal to one percent of the amount you borrow. Still, these loans may provide certain tax advantages that are not available with other kinds of credit.”
If you would like to discuss your best options for paying down debt, please don’t hesitate to give us a call.
Used with Permission. Published by IMN Bank Adviser Includes copyrighted material of IMakeNews, Inc. and its suppliers.