The student loan consolidation process is not necessarily free of charge. Based on the type of student loans you want to consolidate, you may be charged a series of fees. It does not matter whether you use a private lender or a company that specializes in consolidation. There is plenty of work involved to consolidate your loans, and you may be charged for that work.
The fee structure is completely different for federal and private loans. The federal government has passed laws that restrict companies from charging certain fees on federal loans. Private lenders are able to set their own fee structure. The private student loan market is competitive, which is good news for the borrower. Lenders may be less willing to charge fees in order to attract more customers.
It is important to shop around and see what different lenders and consolidation companies offer. Fees can add hundreds of dollars to the amount you eventually end up owing. Some lenders will charge more fees if your credit score is low. Others may waive fees if you have been a long-time customer and are creditworthy. Private lenders may even be willing to negotiate these fees down if they feel you will go with their services.
Here is a list of consolidation fees you may encounter as you research and talk with different lenders:
- Application Fee – Once you decide to consolidate your loans, you will have to submit an application. On the application, you must list each of the student loans that you want to consolidate, along with the terms, interest rates, and remaining balances. You are probably an honest person, but a consolidation company or lender will not just take your word. They will contact each of your lenders to verify the information that you provided. Some private lenders may charge you an application fee. The federal government has passed regulations stating that application fees cannot be charged when you consolidate federal loans.
- Origination/Activation Fee – Many lenders will charge you an origination or activation fee to set up your consolidated student loans. The fee typically ranges between 1% and 5% of your loan balance. Since banks consolidate private loans, you may get a discount. If you are a customer in good standing, they may lower or waive this fee in order to get your business. Your credit score can also influence the percentage you are charged. People with decent credit may be able to have the fee reduced. Ask your lender how this fee will be charged. Often, the fee will be deducted before the new monthly payment is set.
- Prepayment Fee – Lenders are no longer able to charge prepayment fees if you decide to pay the loan back early. It is against the law. In 2008, Congress passed legislation eliminating these fees on private loans. Federal loans have not been charging these fees for years.
- Late Fees – Once you agree to consolidate your loans, you will sign paperwork indicating that you will make timely monthly payments. If you fail to make on-time payments, a late fee will be assessed. The fee will most likely be a percentage of the monthly payment you failed to make. This can be a significant fee, especially if you consolidated tens of thousands of dollars.
- Miscellaneous Fees – Some organizations will charge service fees or loan-processing fees. These fees will cover managing your account, processing your monthly payments, and providing a certain level of customer service. Organizations may also charge deferment fees to cover their loans during this time period. They may even charge insurance fees to cover the cost of insuring your loans. Always carefully read the promissory note they are asking you to sign. The note will discuss the fees you may ultimately be responsible for.
Remember, you should never be charged a fee to have a consultation. A consolidation company or lender should be more than willing to speak with you in person or over the phone and answer any questions you may have about their services. If they want to charge you to discuss the process or current interest rates, a red flag should immediately go up. The lending company is most likely involved in a scam.