Learning How to Consolidate
Student Loans Debt
Most federal student loan holders know that
they can consolidate their existing educational loans
into one loan by using a federal consolidation program.
By calling the Direct Loan Servicing Center, a division
of the U.S. Department of Education, one can often have
a new consolidation loan in a short period of time at
an interest rate that is a weighted average of the interest
rates of all the federal student loans currently held
by the individual.
But what if the loan holder has additional debt that
he/she would like to consolidate into one loan? This
new loan would encompass all of the outstanding debt
that is currently being held by the individual. There
are situations in which this tactic makes sense, and
there are other cases in which it would be a waste of
time and money.
One reason for debt consolidation is if the borrower
cannot afford all of the separate monthly payments.
By combining all of the loans into one, the minimum
payment due each month is usually substantially reduced,
and the loan is spread out over a long period of time.
One way to do this is by taking out a personal loan
from a bank, but in this case, it is usually best to
consolidate all of the other debts into one loan, and
combine the student loans into a separate loan so that
there are only two loans outstanding. The reason it
is not prudent to combine the student loans into one
privately funded debt consolidation loan is that there
is very little chance that a private loan will be able
to beat the low interest rate of an education loan,
especially a federal one. In addition, many times the
interest paid on federal student loans is tax deductible,
so this further lessens the amount of interest that
is ultimately paid on the balance. It just doesn't make
any sense to give up all of those benefits in favor
of reducing the loans down into one. It's better to
have two loans in this event.
An exception to this rule is if the consolidation loan
is in the form of a home equity loan. Sometimes it is
possible to beat the interest rate of a student loan
with this type of loan, so if this is the case, then
it makes sense to consolidate the student loan debt
along with the additional debt into one loan. Since
home equity loans are tax deductible as well, the borrower
wouldn't be giving up any of the tax benefits, and may
actually come out ahead in the long run tax-wise. This
is because as a person's income rises, their ability
to write off their student loan interest diminishes
greatly. Not so with home equity loan interest, as one
can keep on writing this amount off no matter how much
they make.
Thus, when consolidating debt, sometimes it makes sense
to include student loans into the loan along with all
of the other forms of debt, and sometimes these loans
should be consolidated separately
