Of all the loans being consolidated, it is safe to say that student loans and consumer debts incurred during college make up the majority. Student loan consolidation is nothing new, and in fact, it is one of the best ways to save money on a student loan—and years of interest payments.
Direct Loan Rates
Direct Loan is one of the largest student loan lenders, as it is part of the US Federal Government and a mainstay of the student loan market. Naturally, we’ll focus some attention here. Loans from Direct Loans can be consolidated both privately (through a different lender) and publicly. In short, Direct Loans will allow you to subsidize any loan from itself, by itself. That is, if you borrowed four different years from Direct Loans, you have four loans, which can be consolidated into one from Direct Loans.
Ideally, you’ll want to consolidate your Direct Loan debt in a way that brings about the lowest interest rates. Student loans made prior to 2004 were variable rate, and thus the cost rises and falls with interest rates. Right now, the interest rate may be low, so having a variable rate makes a lot of sense. However, in the future, if rates trend higher, then it might make sense to consolidate into a fixed-rate loan from Direct Loans. All new student loans from Direct Loans are fixed rate loans.
Rates on all unsubsidized loans and consolidations are set by Congress. This rate, which has not fluctuated despite a changing interest rate environment, is still 6.8% per year. While high in comparison to the low rates on mortgage debt, these loans are given without pulling credit reports, investigating the ability to repay, and with no risk-adjustment. There aren’t many loan companies that would ever give a 20 year old student a $20,000 loan without at least wanting a credit check or cosigner.
Private borrowing rates for first issued student loans and consolidation loans are far lower than the rates offered by the Federal Government’s Direct Loans. This is because, unlike Direct Loans, private lenders have an incentive to check a borrower’s credit standing, as well as an incentive to make poor credit borrowers pay more for a riskier loan. That said, they also have incentive to reward quality borrowers with lower interest rates.
Consolidation rates from private loan companies vary, but it is usually the case that they range from 1-2% more than the Prime Rate, or the rate which banks pay to borrow money from other banks. Currently, in 2011, this means a consolidation loan can be found anywhere from 3-4% in annual interest, which is well below the cost on other types of student loans and consolidations.
However, keep in mind that advertised rates are almost always a variable rate. Variable rates, at any point in time, are lower than the fixed interest rate for the same type of loan. For example: if you qualify for a 4% variable rate and a 5% fixed rate, then if rates were to rise to 8% then you’d be offered an 8% variable rate and a 9% fixed rate. Locking in the rate does mean you’ll pay more for as long as rates stay lower than the variable rate, but it makes little sense to gamble on something that you cannot control—interest rates. Besides, rates are at near historical lows, and going lower might mean interest rates would have to go to zero. No one would loan money at 0% per year.
Summary of the two
In general, if you have lots of debt and much of it is from the Federal government’s Direct Loans, then go through their services. However, if you have smaller debt loads and it’s a mix of private and public debts, then go to a private lender. Always be sure, though, to seek out a fixed rate loan, which may be one of the best reasons to consolidate for those who haven’t been to college since 2004.