Understanding How Student Loan Consolidation Companies Make Money
Student loan consolidation is a process that combines multiple loans into a single loan with a fixed interest rate. In my experience, consolidation companies play a crucial role in helping borrowers manage their debt more effectively. However, it's important to understand how these companies make money and what to look out for to ensure you get a fair deal.
Understanding the Fees Charged by Student Loan Consolidation Companies
Brianna provided some excellent advice on the fees that a student loan consolidation company is likely to charge. Let's dive deeper into the details.
A one-time set-up fee: This fee ranges from $300 to $1,000. The set-up fee is only charged once your loans are consolidated and paid off in full. Your funds should remain in a trust account, which is under your name and control. A recurring monthly fee: This fee can range from $29 to $59 per month and accrues only after your repayment plan is approved and recertified for another 12 months. These funds must also stay in a trust account until your plan is approved.It's important to note that companies cannot charge any fees until results are achieved. Any company that behaves otherwise is operating illegally. Be wary of companies that only charge an initial processing fee. These companies typically do not aim to stay with you over the long term. If something seems too good to be true, it usually is.
Pros and Cons of Using Student Loan Consolidation Companies
Here are some of the benefits and drawbacks of using a student loan consolidation company:
Pros
Fixed interest rate: Your new consolidated student loan will have a fixed interest rate based on the weighted averages of your existing loans, eliminating high-interest rates. Single monthly payment: You'll have one affordable payment per month to one lender instead of multiple payments to different lenders. If you have financial hardship, an income-based consolidation and repayment plan could reduce your monthly payment to close to zero. Forbearance options: If you're behind on your monthly payments, you can request forbearance for 90 days, giving you time to complete a student loan consolidation and repayment plan while waiving due payments. Loan forgiveness: Federal Family Education Loan (FFEL) Program borrowers who consolidate into the Direct Loan program can take advantage of military benefits and Public Service Loan Forgiveness (PSLF). Your consolidation loan balance may be forgiven in 10 years compared to 20-25 years for others.Cons
Limited interest rate benefits: If your new consolidated loan has a fixed interest rate, you won't benefit if the variable interest rate goes down. Extended repayment period: If your payment plan is stretched out over a longer period, you'll continue to pay interest for an extended time, potentially ending up paying more in interest. Parent PLUS loan limitations: If you enroll a Parent PLUS loan in your consolidation, you will not be eligible for income-based repayment plans. You may still qualify for the graduated repayment plan, but these options may not offer you as low a monthly payment. Loss of forgiveness options: For Perkins loans, you may lose some forgiveness options and interest subsidies.A Personal Opinion on Using a Student Loan Consolidation Company
My personal opinion is that working with the right consolidation company can be highly beneficial. Some of the key questions to ask include:
Are the companies highly rated? Do they have positive online reviews? Do they charge fees before results are achieved? Do they offer any type of guarantee?Just like with hiring an accountant to handle your taxes, sometimes using a consolidation company can be more efficient, especially when dealing with the complexities of loan forgiveness and repayment plans. Each individual's situation is unique, so it's important to find the right approach for your needs.
Conclusion
Student loan consolidation can be a complex and confusing process, but with the right approach, it can significantly simplify your financial situation. Just keep in mind that understanding the fees, the pros, and the cons is crucial in making an informed decision. If you're considering a consolidation company, make sure to do thorough research and ask the right questions.