Low Interest Student Loan Consolidation – Fact and Fiction

by Tracy Murray-Crouch

As the cost of a university education climbs relative to the amount students can borrow through federally subsidized programs, it’s becoming more and more common for students to use a mix of federal and private student loans to finance their education. The availability of private student loans can be viewed as a positive in that it allows more people to complete their education, but there are some real negatives to private education financing as well.

My biggest concern, as one who got out of school relatively recently, is that student loans are universally thought to carry low interest rates, but that’s not necessarily true with private student loans, whose interest rates are determined by the lenders. The idea that all student loans are low interest comes from the fact the government controls the amount of interest charged on federal student loans. We need to make sure that distinction is clear in the mind of the average student, because I’m afraid many students take on private financing they might not need based on the idea that they’ll be able to go through a low interest student loan consolidation with all their loans. That’s obviously not the case, and if these kids aren’t careful they’ll end up with payments that cripple them financially just as they’re trying to establish themselves in the professional world.

If you’re a student, or if you’re researching the subject on your child’s behalf, you really need to understand why a student loan consolidation with low interest is rarely possible with private loans.

With a private student loan consolidation, all that’s really taking place is that you’re combining your private loans into a single balance with one payment, one interest rate, and one repayment period. The interest rate on that single loan may or may not be lower than the rates you were all ready paying with your unconsolidated loans. It will completely depend on your credit score and the offer the lender makes you. The only way you’ll see your payment go down after the consolidation is complete is if the lender does happen to offer a lower rate or if you restructure the repayment period so the loan will be repaid over a longer period of time. That kind of restructuring obviously won’t mean you’re paying less interest – you’ll actually be paying more because you’re dragging the loan out over more years.

Here are some general ideas as far as the terms of the loans you’ll get through a private consolidation:

• 15 to 30 year maximum repayment terms.
• interest rates between Prime+1% and Prime+6% (not so low really).
• minimum balances of $5,000 to $10,000 to qualify for consolidation.
• maximum balances of $100,000 to $300,000.

It really pays to manage your money well while in school; the payments on these kinds of loans will be relatively steep. If you’re the kind of person that wants to follow your passion in your career, instead of having to chase a big paycheck, I’d really encourage you to absolutely minimize the amount you borrow.