What to Consider Before Borrowing

Consolidating your student loans may initially sound like a fantastic idea. When people hear that there is a way to have lower monthly payments, fixed interest rates, and just one bill each month, they can’t wait to sign up. Who wouldn’t want to cut their student loan payments by a third and have more money to spend on other expenses? Rushing into the student loan consolidation process is a costly mistake.

If you are like most people, you will have just one chance to consolidate your loans. You want to make sure that the decision to consolidate makes smart financial sense. Lower monthly payments that end up costing you hundreds more in interest may not be the smartest move. Having one fixed interest rate may sound like a good idea. Once you start digging into the details, you may find out that you will end up paying much more.

Major financial decisions require a little leg-work and some research. You may end up deciding to only consolidate your federal loans, or you may end up deciding to consolidate your private loans. Regardless, there are a few factors every borrower needs to consider. Let’s take a look at some of the most important factors:

  • Dollar Amount of Your Loans – Most services or banks will require a dollar minimum to consolidate your loans. This is especially true if you are looking for a longer loan period. So, figure out the balance of your federal loans and the balance of your private loans. Remember, you will have to consolidate these separately. Most will accept balances that are $7,500 or greater.
  • Your Financial Situation – You need to have your finances in order before you begin the consolidation process. Private lenders will take a look at your monthly income stream and examine your credit history. Poor credit can lead to applications being denied. Consider whether or not you need to add a co-signer to boost your creditworthiness in the eyes of a lender.
  • Interest Rates – Consolidating will give you one fixed interest rate that is applied to your remaining balance. Federal consolidation will cap the rate at 8.25%. Private consolidation fixed rates will vary. Look at your current balances and the interest rates you are now paying. Shop around, and make sure the new rate will not end up costing you more.
  • The Lender’s Reputation – If you take out a home loan, you would research the lender, its practices, and terms. You need to do the same when deciding which consolidation service to use. Each lender will offer different rates, and have different terms and conditions you must follow. They may pressure you to make an immediate decision, but do not. Consider their offer, and measure it against their competitors. You may be able to negotiate a better deal.
  • Fees & Penalties – Ask the lender about any origination fees, prepayment penalties, or maintenance fees they may charge. Lenders should not be charging to consolidate your federal loans. Also, carefully read the section about defaulting on the loan. You may be responsible for court costs, attorney fees, and more.