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Spotting a Student Loan Consolidation "Gotcha" will save your money, and your butt

By Sandy Baker-Evans (past articles)

05/22/2006

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If you are a soon-to-be or recent college graduate, you’re probably receiving a lot of information about consolidating your student loans. As a result, you may be asking yourself, “Why should I consolidate my loans?” The answers are simple:

You can get a fixed interest rate on your loan;
If you have multiple student loans, you can lump your loans into one easy payment made to one lender; or
You can lower your monthly payments by allowing more time to pay back your loan.

An important part of consolidating your loans is learning about the benefits that companies offer. Unfortunately, many times when you receive a consolidation flyer in the mail, it’s filled with promises of reduced interest rates, or includes fine print that allows the lender the right to change or take away the benefit. We call these promises and fine print “gotchas.”

Gotchas are typically glossed over, or worse, buried in the details of your consolidation loans. They can be misleading and ultimately cost you. One of the biggest gotchas involves the primary benefit that consolidators offer you.

Discounts

In many cases, you can qualify to receive a discount after making so many on-time payments. What some lenders forget to tell you is that to “keep” the discount, you have to make the payment on time for the 20 or more years you have the loan, every single time. One late payment could likely eliminate your discount. Over the life of the loan, chances are that for some reason, within your control or not, you may make a payment late. For this reason, it’s best to look for a loan that offers a benefit that becomes permanent after you qualify.

All-in-one Consolidation

The opportunity to roll all of your debt, including credit cards, private loans and education loans, into one loan has its own set of gotchas. It may seem tempting to only have one loan payment each month, but purchasing a loan of this type takes your education loans out of the Federal Student Loan program, causing you to lose several unique benefits. First, Federal Student Loans have a low interest rate cap of 8.25%. In addition, you lose the options of deferment or forbearance. Find out what the maximum interest rate the lender can charge you is, and ask if they will suspend the loan if you go back to school.

Automatic Withdraw

Automatic withdraw from a checking account in exchange for a discount has many gotchas that can trigger losing the discount. Naturally, not having the necessary funds in your checking account is one way to trigger a gotcha. You must keep in mind that it can take up to 10 business days to have your lender stop their automatic withdraw. So, you’ll need a plan if you run out of cash!

Change of E-mail Address

A less obvious gotcha is if you change your e-mail address and forget to tell your consolidator. It only takes a couple of undeliverable e-mail messages to lose the discount.

There are a lot of great benefits and loan opportunities out there. Be sure to research your options before you make lifetime financial decisions. Make sure you understand what you need to do to earn the benefits and what you need to do to keep the benefits. And be sure to read all the details and ask the important questions before choosing a lender. It may save you from a gotcha!

To learn more, or if you need help understanding what you are entitled to, contact nonprofit Student Lending Works at (877) 338-3328 or visit Student Lending Works or nslds.com.

SLW is a nonprofit student lender that offers a choice of education loan discounts based on the individual needs of student and parent borrowers.