Thinking of Consolidating Student Loans? Think Again!
Think twice before you try to simplify your life (or lower interest rates) by consolidating government student loans in with your other debts.
Financial advisors, money management books and websites may all advise you to do this. And it can sound like a great idea. Who wouldn't rather make just one payment a month to cover all debts?
In fact it can be a good strategy with other debts that get out of hand. But when you add public student loans, you could face real problems. A consolidation rolls all your debts together. So if you roll in student loans, they're no longer student loans.
Why would that cause problems? Because that cuts you off from government programs that assist with student debt. Forget interest relief, debt reductions or loan forgiveness programs. You won't even be able to claim your tax deduction for student loan interest. You'll still be paying interest, but without the tax break.
Of course, you can access these government programs for any future student loans (if you've paid off your student loans in the meantime). But you can't get help with the ones you consolidate.
This same caution applies to any advice to turn government loans into bank loans. It's a sign of the lack of student debt information out there that some professional advisors still don't take this into account.
That said, there are two scenarios where you might want to consolidate:
- You've used up all the interest relief and debt reduction you're entitled to, you don't expect to fit any loan forgiveness programs and you’re stressed out by the extra hassles of your student loans.
- You're hopelessly in default. Other Debt 101 articles can help you see if you can still get back to good standing. But if you can't, you're already barred from those government debt assistance programs, so a lower-interest rate consolidation loan might be your best bet.
But remember… even if you fit one of the above, you'd still lose your student loan tax credit on the interest for your student loan. If you make hefty payments, that could amount to hundreds of dollars.
If you fit the scenarios above and still want to consolidate everything, check one thing before you sign the paperwork. Have your advisor show you the math with the loss of that tax credit. That advisor should not be the person who profits off your consolidation loan. You need independent advice.
As for the rest of you… you might save yourself money and stress by consolidating your non-student debt – if the terms are good. Just keep your student loans out of the mix.
AMERICAN READERS: THIS ADVICE IS FOR CANADIANS.
CONSOLIDATION OF US STUDENT LOANS IS COMMON AND NORMALLY HELPFUL --UNLESS YOU ARE CONSOLIDATING FEDERAL LOANS INTO A PRIVATE CONSOLIDATION LOAN.
IN THAT CASE, FOLLOW THE ADVICE GIVEN HERE TO CANADIANS.
IF YOU CONSOLIDATE US FEDERAL STUDENT LOANS INTO A PRIVATE LOAN, YOU WOULD LOSE YOUR ACCESS TO GOVERNMENT HELP WITH THOSE FEDERAL LOANS.
THAT MEANS: NO FORBEARANCE, DEFERMENT, CANCELLATION, LOAN FORGIVENESS OR INCOME-BASED REPAYMENT LIMITS.
TO CONSOLIDATE SAFELY, USE A US GOVERNMENT CONSOLIDATION PROGRAM.