Thinking of Consolidating Student Loans? Think Again!

If you have American student loans, see the all-caps note below this article.

Think again before you try to simplify life (or cut interest rates) by consolidating Canada's government student loans in with your other debts.

You may be advised to do that by financial advisors, money management books and websites. They mean well, no doubt, but being an expert on other kinds of debt doesn't make you an expert on student loan debt.

That well-meaning advice does sound like a good idea. Who wouldn't rather make just one payment a month to cover all debts?

In fact, it can be a good strategy with your other debts. But if you throw in government student loans, you'd risk real problems. Because consolidation rolls all your debts together.

So if you roll your student loans in with other debt, they're no longer student loans.

And that cuts you off from government programs that assist with student debt!

Since they're no longer classed as student loans, you can 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 aid programs for your future student loans (if you've paid off your old student loans or are otherwise in good standing). But you can't get help with the loans you've consolidated.

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.

Bottom line?

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: THE ABOVE 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'D 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 FEDERAL GOVERNMENT CONSOLIDATION PROGRAM.