Judging from the comments we’ve been getting from Credit.com readers lately, borrowers with private student loan debt want to consolidate their loans, but don’t know how.
“I have private student loans, are you able to help me find a way to consolidate to get a lower interest rate?” asks Janice.
“I see all these programs for federal loans, but what if you have private student loans with two different banks? Is it possible to consolidate and if it is, any organization you would suggest?” writes Liz.
Yes, there are options for private student loan consolidation but it’s a much different animal than federal student loan consolidation, and it’s crucial to understand how it works before going into it.
Borrowers hoping to get one of these loans are often looking for one of several possible benefits. They may want to:
- Get a lower interest rate
- Shrink their monthly payment
- Roll multiple debts into one loan
- Remove a co-signer
All of these options may be possible — if you qualify.
“The market has really changed in the past two to three years. There are more options for consumers,” says Stephen Dash, CEO of Credible, an online marketplace for student loan refinancing. There are more lenders offering these loans than before, and each year the number grows. But it’s still a drop in the bucket compared with the number of lenders offering credit cards and mortgages, for example. “When we started (in 2012) there was only one lender offering federal and private loan refinancing,” Dash says. “There are now more than 10.”
(Tip: First, of course, you have to know what type of loan you have. Not sure? Check the National Student Loan Data System database which lists virtually all federal loans. Or, better yet, ask your lender or servicer whether your loan is private or federal.)
“The first step is internal housekeeping,” says Jenny Chou, chief strategy officer at student loan lender DRB Student Loan. “Do I fit their credit profile?” Chou said, for her company, that profile is a borrower who is a working professional with a strong income, good earnings potential in the future and a stable credit history. Dash echoed a similar profile for Credible as well.
If you have fallen behind on your private student loans, consolidation isn’t going to be an option. Nor will it help if you are unemployed or barely squeaking by on a low income. If that’s the situation you find yourself in, you may want to instead talk with a nonprofit credit counseling agency that also offers student loan counseling. There are a handful of agencies that currently provide this service, and they will try to help you figure out a plan for tackling your debt.
Bad Credit? That’s a Problem
Unlike federal student loan consolidation, which doesn’t require a good credit history, a credit check will most certainly be part of the application process here. That means you’ll want to review your credit before going into this process. (You can get a free credit report summary from Credit.com to get an idea of how strong your credit is — or isn’t.) “The important thing is that private lenders will risk-score everyone who applies for one of these loans,” says Chou.
If you have poor credit, you probably won’t be eligible for private student loan consolidation, unless you get a co-signer. And that’s risky — for the co-signer. Even if you pay the loan on time, that debt can affect the co-signer’s debt-to-income ratio and credit scores, making it harder for them to qualify for a mortgage, credit card or car loan. And if you don’t make your payment on time, their credit will suffer as much as yours. So make sure you are confident in your ability to repay the loan before you consider asking for their help.
When you identify a lender willing to extend you a loan, don’t automatically assume it is a good deal. As with any type of loan, you’ll want to ask these important questions before you accept the offer:
Is the interest rate fixed or variable? A variable rate means the rate can change periodically. Be sure you understand how often it can change and whether there is a cap that limits how high it can go.
What will be the total cost of repayment under the new loan? If you are stretching out the loan with lower payments, that may be good for your cash flow, but you could pay more in the long run due to interest. How much more?
Can a co-signer be released? Some lenders will allow a release of a co-signer under specific circumstances, for example if you improve your credit score, show proof of income, and have an on-time payment history.
What happens if I can’t pay? What happens to the loan balance if you die, become disabled or lose your job? If there is no loan forgiveness, you may want to consider getting disability and/or life insurance to protect yourself and/or a co-signer.
More on Student Loans:
- How Student Loans Can Impact Your Credit
- A Credit Guide for College Graduates
- Strategies for Paying Off Student Loan Debt