Post secondary education, whether it's college or university, comes with a price tag. Students have to figure out a way to pay for their tuition, and for most people this involves taking out student loans. According to the Canada Student Loans Program, 2013-2014 graduates from four-year university programs carried an average of $34,000 in student debt in a mix of federal, provincial, and private loans.
So now you're a graduate with a degree, but you've also got the debt that often goes with it—now what? Figuring out how you're going to manage your new student loan bills and still live the sort of life you'd like requires planning. In this article, we'll look at some of the considerations that should go into that planning, including loan consolidation.
What is loan consolidation?
Consolidation, at a basic level, means bringing multiple things together into one. For loans, this means taking multiple loans with different interest rates—and often from different sources—and rolling them into one loan. During this process, a new interest rate and terms are negotiated. Think of it like selling multiple different debts to one new location. The benefit of this process is that it may lower your monthly payment and give you more time to repay your loans.
Below are some tips to consider when evaluating the overall loan consolidation process.
At first glance, it might seem like loan consolidation is the most logical answer when dealing with multiple payments and creditors. Who wouldn't want to make one payment a month rather than multiple? It's less to keep track of, right? As counter-intuitive as it sounds, the downside to putting all your loans in one place is the fact that you're putting them in one place. There are some benefits to having student loan debt that are lost when that debt is involved in loan consolidation.
Examples of benefits of having student loan debt include:
Federal assistance programs
Once you've consolidated a student loan, it no longer retains that special "student" loan status—it becomes a regular loan like anything else. Loans, by their very nature, generate interest, but student loan interest is something you can file as a deduction on your personal income tax. You can't do that with normal loan interest. The second potential drawback to consider is the loss of access to some federal assistance programs related to student loans. Based on certain eligibility factors (like residence, income, and disability status), you may qualify for student loan relief, which isn't available for other normal loans.
If you're considering a student loan consolidation, it's in your best interest to boost your overall credit score as much as possible. Like other financial transactions, you're about to enter into a new set of loan terms based on your creditworthiness. When lenders evaluate you for loan consolidation, they're going to look at your overall credit picture to decide what sort of lending risk you pose. This means that bad credit will likely play a determining factor in the terms of your new loan.
Take the time to review your Equifax and TransUnion credit reports to make sure they're as accurate as possible. While you can't immediately change your student loan situation, you can work to make sure the records are accurate and are not weighed down by anything that shouldn't be there. Evaluate the contents of your report and work to dispute/question anything that seems wrong (such as fraud or inaccurately reported late payments). Having a good and accurate credit report is always important, but is especially relevant when new student loan consolidation rates and terms are determined based on that information.
Don't have your credit report, or want to look it over with a professional? You can book a free Credit Building Counselling session with one of our counsellors and they'll pull your report, get your score and give you tips on how to build your credit and improve your score. Call 1.800.267.2272 to book.
Consolidation can result in a lower overall interest rate, which gives you more bang for your literal buck. Think of it like this: The higher the interest rate of a loan, the more interest it generates (that you eventually will have to pay). By potentially lowering the effective interest rate through loan consolidation, you can spend less overall money over the life of the loan—even while paying the same amount per payment.
At the end of the day, the principal payments are what matter most—they're what the whole arrangement is based on. Interest gets added to it as the loan progresses, but, ultimately, the originally borrowed principal amount decides how many interest dollars add up (depending on the interest rate, of course). You could have a 50% loan but a principal of $100 ($50 in interest) versus a 5% loan with a principal of $10,000 ($500 in interest)—this shows how the principal matters as much, if not more, than the interest rate.
Student loans are a fact of life for tens of thousands of Canadians – take the time to figure out how you'd like to address yours. You'll find that while having a plan doesn't change the numbers on the paper, it’ll go a long way toward making you feel better about them.
Learn more about how to successfully manage your student loan debt, and any other debts you might have. Contact us today for a free debt assessment.
Topics: Debt Consolidation
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