I graduated with my undergraduate degree at the perfect time. Consolidation federal student loan rates were at an all-time low. I locked in a consolidated rate of 2.75% for the life of the loan! It was awesome because I have already saved thousands in interest with a rate that low.
The best consolidation rates you’ll find this year are in the 6 to 7% range. More than two-thirds of college students leave with student loan debt, and the average bill they are carrying is $19,200, according to the Department of Education. There’s an obvious need for recent graduates to be counseled about what to do with their student loans. I am only one person, and I’m not a certified financial counselor, but if you want my opinion, that is what I will give you.
Consolidating is still the way to go, with caution.
You may not save much on interest payments by consolidating your loans at the current rates. But, I would encourage you to shop around for a good private consolidation loans company. College Loan Corporation is a credible college loan consolidation company, and I have heard that their customer service is pretty good. There are three reasons why I would consider consolidating, even though the initial math might not equal much savings.
- It simplifies your life. Loan consolidation puts all of your payments into one lump sum payment. You don’t need to keep track of 6 to 8 different payments you need to make every month.
- You can still get your rate down by up to 1.25% with certain incentives. Generally, most consolidation or refinance companies will knock off .25% for setting up automatic withdrawals from your checking account. This one is hard to swallow for only a .25% reduction. There may be a time when you don’t have the money in your account, and then they get angry when they can’t pull the money out. I would watch out for this, but if you are disciplined enough to have them EFT your account, go for it. Also, if you make your first 12 payments on time, they will knock off 1% after one year. This is a nice rate reduction. You’ll see nice savings by knocking a point off of your consolidation.
- You can negotiate a little bit with private consolidators to help get you the best rate with incentives to lower the rate. It is a very competitive business, as you will see with the barrage of junk mail you begin to receive in the next six weeks. Don’t think that they won’t negotiate a little bit with you, and many of the customer service representatives are very accommodating. Remember, they’re salespeople in this instance. They want your business, so they are willing to work with you.
I don’t claim to have all the answers or think that all of my opinions about money are the correct opinion. However, I have to disagree with you about this one.
I would always suggest that someone pay off their debts as quickly as they can. The reason for this is the elevated factor of risk that is placed into our lives when we have debt payments. If you are satisfied with paying $200 bucks a month for the next 10 years, a lot can happen in 10 years.
What if you lose your job while your wife is pregnant? What if a medical emergency occurs that requires some significant out-of-pocket expenses.
Insurance helps, but these situations can cause some extraordinary financial burdens. Now, you have to put those student loans on hold to pay for other things, and your credit is destroyed, and creditors are calling you every day. If you had paid off those debts early, you wouldn’t have to worry about them when the worst happened. I’m not trying to be pessimistic, but it is naive to think that financial hardship won’t happen to you or me.
When we keep debt lingering around, it increases the risk in our financial lives.
Second, why would you ever borrow against your own money? What you just described to me is no different than saying you have $10,000 in the bank. You want to start a small business with $10,000, but instead, you take out a $10,000 loan at the bank at 8% interest because you are making 10% on the $10,000 in your bank. Is the 2% net gain really worth it if the worst happens?
The worst would be that you take the $10k in the bank and pay for a new roof on your house, then your small business fails due to a shift in market demand. Now, you owe $10k, but the $10k in your bank account is gone. If you had paid the $10k for the business up front, you could have patched the roof to hold you over for another year or so and stayed out of debt. Does that make sense?
It’s your money, and you can play the interesting game, but know that it increases the risk in your life, and risk is a calculable variable that decreases the net gain of an investment.
The Bottom Line
Pay off your student loans as quickly as possible. Develop a plan to pay them off within a certain amount of time. Don’t settle for paying them off in a 10 or (gasp) 20-year period. Those loans will begin to feel like the roommate that you can’t get rid of. My suggestion is that if you have some other smaller debts such as credit cards or other small bills lingering around, clean those up and get them paid off before you start tackling the big, hairy student loans. This will allow you to focus more on paying them off with bigger payments that knock down the principal balance quicker.
Don’t be overwhelmed when you see the size of the loan. Even though it only paid for a piece of paper, the knowledge and experiences that you gained will help you be a more productive and valuable asset in the working world. Whether it’s working for a large corporation or owning your own small business, a college degree is valuable even though it’s not necessary to succeed in life.