Recently, I was asked by a client about consolidating student loans:
What is it really? Is it a good idea or not? What is the difference between just paying off federal loans and consolidating? Are the benefits worth it? I read a blog about a guy who found out about consolidating student loans after he paid off his loans and explained how he wished he would have known about it before he started paying his loans off.
After doing a little research, here was my reply:
There are a few things that should be considered before consolidating loans to a private lender. Â Studentaid.gov website is a good site if you are aware of some of the inconsistencies especially if loan forgiveness is part of the plan. Here are some other things to consider:
- Inventory the loans into Federal and Private loans.
- Understand the difference between Federal and Private. Only the federal loans can use the studentaid.gov repayment methods.
- Repayment methods have different rules, especially when it comes to how one files their taxes (single or married filing joint).
- Repayment methods also have different rules regarding loan forgiveness and interest capitalization.
- Know the various cash flow options. The federal loans have nine different options to pick from and you can move from one to other. Private loans have less flexibility.
- Once you consolidate the federal loans to a private lender, you cannot re-establish the federal payment benefits.
- Understands the loan forgiveness rule on both an employment restrictions, and tax consequence.
- Private loans usually require a co-signer. Â This person should be aware of the legal risk they are taking and how they can be removed from the loan in the future.
- Co-signers might consider life and disability insurance on the person with the loans to cover their risk.
Here’s a few other resources:
- http://whitecoatinvestor.com/
new-players-in-student-loan- refinancing/ is an excellent article on the various places to refinance your student loans It does a good job of explaining the conflict of interest of the blogger in that they earn a small fee for click throughs from their site. - http://askheatherjarvis.com/Â gives you an expert on student loans with online resources and a forum to ask questions.
- https://studentloanhero.com/
featured/5-banks-to-refinance- your-student-loans/#Â offers you what they consider to be the 6 best places to refinance, complete with descriptions, terms and rates. - http://amreinfinancial.com/Â – Fred Amrein is an fee-only financial planner that specializes in college planning and has done webinars for NAPFA.
