Author: Ian McAllister
Why is student loan consolidation a last resort?
There are major advantages to student loan consolidation, but also major disadvantages. Find out why you should look this gift horse in the mouth.
Your Life Skills
If you don’t learn to handle money you will be in trouble for the rest of your life. If you win Lotto you could be poor next year without learning to handle money.
Think about it. If you use student loan consolidation, getting rid of all your credit card loans, are you just going to build up more credit card debt? If you have mastered the self-discipline to avoid future debt, student loan consolidation is the best thing since sliced bread, but you probably won’t need it.
What is Student Loan Consolidation?
You transfer all your existing loans to one low-interest account.
What are the advantages of Student Loan Consolidation?
If you do your student loan consolidation within the 6-month grace period offered by the Stafford student loans in the USA you will get very favorable interest rates. You will also find it easier to keep track of your repayments if you have only one loan.
Credit card fees are larcenous. If you are paying 18% interest and can get student loan consolidation to drop to 5% interest the advantage is obvious.
What is more there are often extra discounts if your student loan consolidation is done during the 6 month grace period at the end of Stafford loans. And if you keep up with your payments for two years you may get another discount.
However, did the Stafford loans have fixed interest at 3%? Will your student loan consolidation leave you with a variable interest that could climb rapidly, or with a fixed interest of 8% that could fall in the future?
You should become conscious of your credit rating. If you have taken out one subsidized Stafford loan for each of four years, and one unsubsidized loan you will have eight loans, and the unsubsidized loans will have accrued interest.
Now computers are stupid. They will notice that you have had eight loans for a long time, and you have never done anything at all to pay off any of them. Ooooooh… you must be a very bad risk. You get a bad credit rating. Computers are stupid.
When you use student loan consolidation, the computers see that you have only one loan, not eight, and that you are making regular payments. You’ll have good credit rating. That is unless you build up credit card and other debts of course.
Avoiding student loans
As I showed you in part 1 you can learn vital life skills that will at worst mean fewer student loans for student loan consolidation, and at best no loans. You will be able to make your money go twice as far, which means that you will effectively be twice as rich, and the IRS can’t touch you for it.
If you don’t have these life skills, you’ll be suddenly confronted with having to pay for your food and lodgings and car loan and credit card loans and mortgage and health and… the list is never ending, and many students are totally unable to cope with it. If this describes you, then don’t go for student loan consolidation. Use my debt reduction process described below.
If you decide on student loan consolidation
- Check how much they will lend
- Can you consolidate your other debts… credit card and car loan?
- Will you need proof of income?
- Can you choose between fixed and variable interest?
- Are there pre-payment penalties? Avoid them like the plague!
- What are the penalties if you default? If you are unemployed or lack self-discipline you are likely to default.
- What other loans must you get – mortgage, kid’s schooling?
Avoid companies demanding that you start repayments of your student loan consolidation immediately the grace period ends. Look for special incentives. If you get a 1% discount after 2 years it may not sound like much, but it mounts up over the years.
You will find lots of student consolidation loans that offer “no start-up costs” which is good, but less important than low interest rates and absence of prepayment penalties.
A better alternative than student loan consolidation?
- This will encourage self discipline.
- You don’t know what the interest rates for student loan consolidation will do in the next 20 years. So you may or may not have total lower loan repayments than you would have with student loan consolidation.
- You will be in control… not at the mercy of student loan consolidation suppliers.
Here is what you do to avoid student loan consolidation. You will have to work at it which is another advantage over student loan consolidation.
List your loans
Write down every loan that you have, together with the amount owing, and the monthly repayments that you’re making. Divide the amount owed by the repayments to see how heavy your burden is. The larger the result, the less burdensome it will be to keep paying off that loan.
Suppose you have a mortgage of $100000 with a monthly repayment of $500 the division would give you 200.
Imagine you had a fictitious list like this
List your surplus
Using the methods in part 1 to earn and economize. Work out your surplus each month after all your expenses. Suppose you can spare an extra $456 each month.
Look for the lowest figure on the right of the above table. It is 10 opposite Master card. So you add your $456 to your monthly payment of $200, reducing what you owe by more than $656 each month (remember you are paying interest on less)so you should pay off this debt in roughly three months.
Now your self-discipline comes into play. Don’t go out on an expensive celebration!
You have been paying $656 per month that is now surplus, so you add it to your visa account. That makes your repayments $906 each month. You will get rid of your Visa debt in a little over four months.
Now you have the princely sum of $906 + $ 360 = $1266 to contribute each month. That means that you will be free of your car loan in less than eight months… quite a lot less when you consider the reduction in interest paid each month.
To cut a long story short, when you start to concentrate on your mortgage you will have $1266 + $100 + $333 = $1699 to add to your mortgage repayment of $500 per month.
When you start making repayments of 2.2 thousand dollars each month your twenty year mortgage will suddenly shrink to less than four years. You will have everything paid off before your first child is ten years old.
Is it worth the effort?
Isn’t that worth a little bit of self discipline? Don’t you think that the life skills you now have will help you to stay out of debt in the future?
But it gets better. An Australian kid got into debts of hundreds of thousands of dollars, and used the above method to get out of debt. Then he went on to become a millionnaire in his twenties. He no longer needs to work, but he has a hobby of showing people how to become millionnaires.
Who would you prefer to teach you about money?
Education puts a professor of economics at the university at the top of the tree. But when you make enquiries you find that he is deeply in debt. Would you prefer the academic professor, or a self-made millionnaire to teach you about money?
What is more, you don’t have to pay for a university course to find out what it is all about. Jamie was deeply in debt in his late teens, and a millionnaire in his early twenties, and he is offering a book and DVD free, to help you follow in his footsteps.
When I took him up on his offer, his book was 258 pages long. Of course, he doesn’t hand you everything on a plate for free (you don’t become a millionnaire by being stupid) but you could learn everything needed to follow his advice with a bit of luck and a lot of research. Or you could get Jamie’s help.
To get your free E-Book and DVD called “What I Didn’t Learn At School But Wish I Had” (the book sells for $34.95 in all leading book stores) that I have found extremely valuable and wanted to let you know how to get it for free as I did. Just get Millionaire Coaching to help you out of debt.