Why Paying to Consolidate Your Student Loans Is a Rip-Off

consolidate student loans

When it comes to finances, everyone needs a little help sometimes. It doesn’t matter how old, educated, or experienced you are: money decisions can feel overwhelming when you’re making them on your own.

Unfortunately, that can lead to paying for services that you very easily could have done yourself. Or worse, falling victim to an outright scam.

This happened recently to a friend of mine who paid $600 to consolidate his student loans – only to find himself in default and with no clue what to do next. Here’s how to keep that from happening to you.

What does it mean to consolidate student loans?

The word “consolidate” has become one of the murkiest in the financial industry.

Originally, this referred to combining multiple debts into one for a single payment and creditor. But now some companies claim to consolidate debt when, in fact, they settle it.

However, these are two different things, with very different credit consequences. That said, let’s talk about what it means to consolidate student loans. Here’s how FinAid describes federal consolidation loans:

Consolidation loans combine several student or parent loans into one bigger loan from a single lender, which is then used to pay off the balances on other loans. They also provide an opportunity for alternative repayment plans, making monthly payments more manageable.

Meanwhile, the Consumer Financial Protection Bureau (CFPB) describes private student loan consolidation as combining your private student loans into one larger loan, “replacing your original private student loans with this new loan.”

The CFPB goes on to explain how private student lenders “may offer an interest rate deduction for creditworthy borrowers seeking to consolidate their private student loans.” Essentially, it’s the same thing, except for one caveat:

Just like private education loans, private consolidation loans often have variable interest rates – meaning your interest rate can change over the life of the loan – the interest rate you are offered depends on your credit score.

Essentially, to consolidate student loans is to combine several loans into one, potentially with the opportunity to achieve more favorable repayment terms.

Student loan refinancing vs. consolidation

Student loan refinancing is the act of paying off your student loans with one new loan – very much like consolidation. The difference is you can combine private and federal loans into one this way, which you can’t with consolidation.

You’re also able to refinance a single student loan if you’re simply trying to achieve more favorable terms.

Like private student loan consolidation, student loan refinancing is a way to turn a variable interest rate into a fixed rate if you so choose. Yet, refinanced loan offers may come with variable and fixed rate options (in addition to various options for the repayment term).

Student loan refinancing can be a good idea if you want one payment and to lower your interest rates. However, keep in mind that it doesn’t come without risk.

For example, if you have federal loans, refinancing them means turning them into private loans. And that means losing out on protective perks like forgiveness, deferment, and forbearance.

But, if you consolidate your federal loans through a Direct Consolidation Loan, you get your single monthly payment, potentially more favorable terms, and your loan stays federal. Which means you still get the protections that come with federal student loans.

Check Out Earnest Student Loan Refinancing

Don’t pay to consolidate your student loans

The reason you shouldn’t pay to consolidate student loans is simple: you can do it yourself.

When my friend sought help consolidating his student loans, he thought the company he was working with could change the terms of his loans. He didn’t know it’s as simple as getting a consolidation loan to pay off the other loans and, in turn, achieve new terms.

So he paid a company a large, upfront fee and waited as the company went ahead and lowered his payments through an income-driven repayment plan.

Unfortunately, due to some miscommunications and missed payments from this company, he found himself delinquent on his student loans. And out a few hundred dollars to boot.

Luckily, there’s a happy ending to this story. My friend is getting a refund and taking back control of his loans. But it didn’t come without a few months of intense stress.

The moral of the story? If you want to consolidate student loans, you don’t need to pay someone to do it for you. You can do it on your own. Here’s how.

DIY student loan consolidation

Here’s how to consolidate student loans on your own.

1. Decide if you should consolidate or refinance

The first step to consolidating student loans on your own is deciding if consolidating is the right move.

If you have just one loan and want more favorable terms, then student loan refinancing is probably what you need. The same goes if you have both federal and private student loans, or all private loans, and you want to combine them into one with a lower interest rate.

But if you have all federal student loans and you want to bring them under one servicer with one payment, consolidation could be your tool.

Refinance Student Loans With SoFi Today

2a. Federal student loan consolidation

Federal student loans can be consolidated through a Direct Consolidation Loan. You can apply for that here with the Office of Federal Student Aid. We also offer our own tool to help you apply to consolidate student loans *for free.* You can check it out here.

2b. Private student loan consolidation

If you’re refinancing your loans or consolidating private student loans, then you’ll need to find a lender. Take a look at our list of the six best banks to consolidate and refinance student loans, including their rates and eligibility requirements.

And if you go this route, make sure you get the lowest interest rate possible so you can pay less for your student loans over time.

3. Choose terms that will help you reach your goals

No matter what, focus on the loan terms that will help you reach your goals.

If you need lower payments but also want to pay your loans off faster, remember that the terms that help one don’t always help the other.

For example, monthly payments are often lowered with longer repayment terms. However, they also keep you in debt for longer. But, if your interest rate is much lower, that could be a way to pay the loans off faster while also getting a lower monthly payment.

Decide what’s most important to you. If you’re seriously struggling to make ends meet, you may want to be open to a longer repayment term if that’s the only way you can get lower payments. If faster repayment is your top priority, go for a shorter repayment plan.

4. Know the potential downsides before you sign

Finally, before you sign anything, read all the fine print. This is especially relevant with student loan refinancing; that’s when federal loans turn to private and you lose the protections that come with them.

However, the fine print on federal and private student loan consolidation is just as important. Knowing how much you’ll have to pay each month and how long you’ll be repaying the consolidation loan are two very important facts to consider.

The more you know, the less likely you are to pay extra money unwittingly to pay down your student loan debt. And you can enter into loan consolidation with confidence, knowing exactly what you’re agreeing to.

With this knowledge, you can confidently enter into a successful loan consolidation on your own, without having to rely on (or pay!) a third party.

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