Private loans represent only 10 percent of student loan debt, but that number — more than $200 billion – is still significant and, in many cases, even harder to pay back than federal student loans.
Private loans usually carry a higher interest rate than federal loans and there are fewer relief options available when borrowers are in distressed situations. Like federal loans, private student loans cannot be discharged in bankruptcy. Thus, there is little incentive for private lenders to offer lower rates as they retain a strong claim over the debt even if the borrower declares bankruptcy.
However, thanks to a plentiful money supply the past few years, several banks and credit unions are now offering chances to consolidate private student loans.
The interest charged is still an obstacle, but because that rate is based on the borrower’s credit score, there is some wiggle room. When considering options to consolidate private loans, remember that you qualify for lower rates if you have graduated, taken a job and made steps toward improving your credit score.
It also helps if you own your home and have built some equity in it. That would qualify you for a home equity loan, which carries a fixed-interest rate as opposed to the variable rate loans that dominate the private student loan market. Fixed-rate financing makes keeping track of finances a good deal easier.
Credit unions have become particularly aggressive in pushing private student loan consolidation. The average age of credit union members is around 50, so offering student loan consolidation is a way to attract a younger customer base.
Some credit unions and banks even offer discounts on interest rates if you become a regular customer or if you enroll in an automatic payment program.
At the very least, loan consolidation will help reduce the number of bills you have to pay each month, possibly lower your monthly payment and make it easier to keep track of progress.
Important Facts on Private Student Loan Consolidation
Comparing loan consolidation options is like shopping for any kind of loan from a private lender, meaning the rules vary from institution to institution.
However, there are three constants every lender will look at before granting a private student loan consolidation loan: Do you have a steady income? What is your debt-to-income ratio? And what is your credit score?
Steady income is a polite way of saying do you have a full-time job. If so, that’s a huge you’re your favor. Lenders are far more likely to approve a debt consolidation loan when they know there is a weekly paycheck behind it.
Debt-to-income ratio is a math equation – amount of recurring monthly expenses divided by amount of monthly income – that measures of how much debt you can handle based on your income. Lenders can make loans when your DTI is in the 40%-45% range, but they really prefer you have something less than 35%.
Your credit score is a measure of your ability to pay back a loan. Lenders prefer your score to be above 700, but you could qualify for a debt consolidation loan with a score as low as 660.
It is imperative that you compare each lender’s requirements before signing an agreement. Some of the areas to consider include:
- Minimums and maximums.Each of the private lenders has its own lending limits and ceilings. The minimum loan amounts are between $5,000 and $10,000. The maximum amounts range from $40,000 to $300,000, with one institution setting no maximum. It is possible that a private lender may choose not to set a maximum, which may benefit you if your loans are large and the consolidation terms are better than your original terms.
- Interest rates can be variable or fixed. The low end for interest rates is 4.75 percent with no real cap for maximum interest rate because that is based on your credit score. Beware of the variable rates on all loans, private loans in particular.
- Almost all private loans require a co-signer. For students, this typically means Mom or Dad co-signing for the loan. Some lenders release the co-signer from the agreement, if the borrower makes on-time payments for a specified time. The length of time you must make payments may vary, but range from as little as 12 months of on-time payments to 48 months.
- Discounts available. A few of the private lenders offer discounts of 0.25 percent or even 0.50 on the interest rate for automatic payments or opening an account at that institution.
- Public or private. Be certain to check with the institution servicing your loan to determine whether it’s a federal loan or private loan.
- Fees and penalties. The origination fees for private loan consolidation range from zero to five percent. Most lenders have no prepayment penalties.
- Yes to Federal Loans. While it is not possible to consolidate private loans within the Federal Consolidation Program, it is possible to consolidate federal loans within a private consolidation program. The only advantage to doing so, however, would be if you qualify for a lower interest rate on the private consolidation loan. By consolidating federal loans, you may forfeit your right to options like loan forgiveness, income based repayment, extended terms and other benefits available in federal loan programs.