Getting an education might help you earn more money in the future, but it carries a high cost. Student loan debt is something many young people struggle with for a good portion of their lives. If you’ve racked up a lot of debt, you’ll want to take a moment and consider whether consolidating those debts can help you. Debt consolidation can actually help you pay off your debt sooner, if you know how to organize and properly manages the rest of your finances.
Keep Private Loans Separate
There’s no benefit to consolidating non-student loans with student loans. In fact, many times, there are disadvantages. Student loans may have better repayment terms than your other loans. For example, if you go ahead and consolidate all of your loan debt, you might end up with a situation where you’re only making one payment a month, but you would have sacrificed all of the benefits of low interest rate loans (on student debt).
There used to be a time when student loans carried a variable rate. That’s no longer the case. If you have or had a variable rate loan, switching to a fixed rate loan might make sense if the fixed loan carries a lower rate. Otherwise, keep your non-student loans and student loans separate.
Shop For Interest Rates
Like any other consolidation attempt, shop around for the lowest rate. Keep in mind that origination fees and other expenses might actually increase the total cost of the loan. You should analyze the full cost of the consolidation before automatically assuming that debt consolidation is in your best interest.
Consolidate and Conquer
Consolidating student loans can stretch out your debt repayment period. This can be a good or bad thing. If you can get a longer repayment period, it builds flexibility into the loan. However, it often tacks on several thousand dollars in interest payments. Rather than paying off the loan on schedule, use arbitrage to pay off the loan earlier than you could have prior to the consolidation. How? Simple. Consolidate the loan – this lowers your total debt payment.
Take the difference (the amount you saved via consolidation) and invest it in a very conservative investment like a bank CD, high cash value life insurance policy, a bond fund, or some other investment that is relatively stable or guaranteed to pay a specific rate of return. You’ll also want an investment capable of earning compound interest. A tax-free option, like cash value life insurance, makes accumulating a savings even easier (as long as the policy is designed for cash value growth and not for maximum death benefit coverage).
By making regular loan payments, and keeping a “side fund,” you accomplish two things. First, you start building a savings that could be used for emergency purposes. Second, you take advantage of paying simple interest on your student loans while earning compound interest on your side fund. The side fund will grow rapidly due to the nature of compound interest and eventually equal the total student loan debt amount. In this way, you are able to pay off your loan early without committing more money to the loan than you can reasonably afford to. Your investments, in effect, help pay off the loan faster than you could alone.
Shop At The Right Banks
Banks that will consolidate student loans are becoming rare. However, there are a few that still offer this service. Chase, Student Loan Network, and Wells Fargo are all great options. When shopping for consolidation, make sure you get favorable repayment options and that your contract does not include a penalty for prepayment. You want the ability to pay off your loan early, especially if you plan on using a side fund to accelerate the loan repayment.
Guest Post contributed by Loraine Heimann who is a freelance writer after a longstanding career in finance. Find out more about the Wonga payday loans alternative.