I remember it like it was yesterday. As I sat in the financial aid office at my local community college, I signed a document which has led to the longest relationship I’ve ever had in my life: my student loan. I say the longest relationship because no matter what I say or do, they will be there until I pay them off in full or my public service loan forgiveness kicks in. But even then, I have to pay taxes on anything that is left after the ten-year repayment option is up which could be a lot.
Student loans are the one type of debt that can never be charged off during a bankruptcy. A lot of student loans are through the government and people, including the government will do what they can to get their money back since it can never be charged off. While it may seem scary once you have taken out student loans, there are a few student loan consolidation options that may work for you and your financial situation.
Why Should I Consider Student Loan Consolidation?
Like any loan or line of credit you open and charge to, interest adds up and can eat the payment you apply every month. Instead of your money going towards the principal like you think it is, it may just be going towards interest and will take your loans even longer to pay down. Student loan consolidation may be an excellent way to lower your interest rate to help you save money over the term of your loan. Consolidation should be considered if you are looking to pay off your student loans even faster and on your own terms rather than a standard payment plan over ten years.
Student loan consolidation may also be a great option for you if you work in public service. Public service can be through a variety of choices such as education or non-profit work and allow you to pay a lower student loan payment while being flexible with your career. Public service also qualifies you for the public service loan forgiveness program. If you consolidate with this program, you are eligible for student loan forgiveness after ten years. You will still be responsible for taxes on any remaining amount as stated above but it is still a good option for someone who is looking to be making a career out of serving their community.
Consolidating may also be a good option for you if you have multiple lenders and loan payments. By consolidating, you are only responsible for one monthly payment to one lender. This may be a relief in more ways than one, especially if you are trying to gain control over your finances.
Public student loan consolidation
Public student loans through the U.S Department of Education are considered federal loans and are available for consolidation through StudentLoans.gov. StudentLoans.gov will walk you through what consolidation option is right for you given your current circumstances in life.
All loans are refinanced through Direct Loans or the FEEL Program and given one general interest rate, which is usually higher than a private lender. The difference is there is some wiggle room here regarding your payments, and you have the option for forgiveness.
Some people chose to go into an income based or pay as you earn plan as part of their consolidation terms. While you do not need to agree to either of these and can stay on a standard repayment plan, it may be an option if you are under employed or still hesitant about which career you would like to pursue yet still need to start making payments. When I was working part time after college in 2010, it was an option I considered. It helped me make progress on my loan payments while allowing me to be still able to live on a part time income at the time and to research what I was going to be doing in the next stage of my life.
My student loans have since been consolidated under Direct Loans for the Public Service Forgiveness program. As mentioned above, this program is to allow people who serve their community the option to have their student loans forgiven.
An important reminder if you choose this consolidation option. You will still owe any taxes on the amount that is to be forgiven. So you could realistically have thirty thousand forgiven but still own an absurd amount come tax time.
You do not need to use a private company to consolidate any federal loans. This is free to you service provided by the government and an option for anyone who secured their loans federally. With federal student loan consolidation, you may also qualify for forbearance and deferment, which allows you to take a break should something happen financially and you cannot make your payments at this time.
Private student loan consolidation
Private student loan consolidation is through a private lender. It can be private loans you have taken out that were not part of a federal loan offer you received or include federal loans.
The pros to consolidating under a private lender are that based upon your credit, you may qualify for a lower interest rate on your student loans. This means you can pay off your student loans more quickly with more of the payment amount going towards the original principal and not interest.
Along with your credit score, private lenders who consolidate loans look at your job, the amount of money you are making, and your educational background before they decide if your loans are something they will refinance.
If you haven’t been at your job a long time or if you have recently had a negative drop in your credit score, this option may not be the best for you. You can always stay on a standard repayment option and then refinance at a later date.
Which One Is Right for You?
The current factors in your financial situation will determine what consolidation method is correct for you if you choose to go down this path. There are pros and cons to both that we have discussed up above. If you aren’t sure what your financial life will be or your financial options, make a realistic budget to see what you can and can’t afford in regards to your student loan payments:
- If you are looking at potential job loss or unsteady income, public student loan consolidation with a pay as you earn or other income based repayment plans may be the right option for you. This may also be good for you if you are looking to serve your community or may be going back to school at a later date.
- If you are financially stable and have the financial basics down, such as a budget and living within your means while saving for retirement, student loan consolidation through a private lender may be right for you. This would be a quicker way to get rid of any student loan debt that may be preventing you from living the financial life you deserve.
The bottom line
A lot of people look at student loans as evil, but I am a firm believer that you don’t have to. Student loans allow you to further your education by choosing a field you want to learn more about and then enabling you to gain experience before you join the workforce.
By consolidating your student loans, you are choosing to have one payment under one interest rate which allows you to better plan for the future and the kind of life you want to live. By following our advice above, you can pick the right method for you.