Private Student Loan Consolidation

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student loans or private loans, are to borrow no more than your expected first year starting salary, and to have total monthly payments that are no greater than 10% of your monthly income.  Also be aware that federal students loans will always be a better choice, and borrowers should make every attempt to avoid private student loans.

With student loans so ubiquitous these days (70% of all students finishing college have student loan debt) it is easy for students, especially young students who have little experience handling money and dealing with debt, to become a bit cavalier in their decisions.  They just naively think that they can borrow as much as they need to college, get a good job and everything will work out just fine.  They are simply not aware of the millions of people who have defaulted on student loans and who are overwhelmed by their debt. 

A good example in point is that of an attractive and intelligent young woman who finished college and found an excellent job in television journalism.  She made a blog post expressing exasperation at her plight because of her student loan debt.  Her job was certainly a good one, but the starting pay for TV journalists is apparently not that high.  She decided to go to a private college in New York, and to pay for this she took out four student loans, one federal loan and three private student loans, for a total of $115,000 borrowed.  Her monthly payments on these four separate loans were about $1200 per month, and this was well beyond what she could afford.

She looked into getting a private student loan consolidation with her lender to lower her payments, and her lender simply refused to do this citing a tight credit market.  So this young woman was stuck with having to deal with huge payments each month, at least for the time being.  So that is the first lesson with regard to private student loan consolidations: they are not certain to happen.  With federal student loans a consolidation is mandatory, but that is not the case with private student loans.  And if the time comes that she is able to do a private student loan consolidation, the interest rate on the loan will be dictated by the lender, and that rate is liable or even likely to be very high.  With federal student loan consolidations the interest rate is fixed by law to not exceed a certain threshold based on the existing loan interest rates, which will already be substantially lower than the rates for private student loans.

This young woman is likely to struggle with her student debt for many years, and it is clear she made several mistakes.  As alluded to above, she borrowed way too much in the first place, both in terms of the total amount borrowed (her salary was nowhere near the $115,000 she borrowed), and her monthly payments were too high.  Also, maybe instead of going four years to an exclusive private school in New York that she could not afford, perhaps she should have settled for something less, at least for the first two years, so she could keep her student loans down to manageable amounts.  Had she understood when she started school what her debt burden would mean she probably would have made different choices.  She is one of the lucky ones and actually has a decent job.  If she ever loses that and has to go into default she will find herself in really big trouble.

The take away from this story for other student borrowers is to understand that student loans, especially private student loans which have much higher interest rates than federal loans, can get you into very deep financial trouble.  And it is not always a given that a borrower will have the ability to obtain a private student loan consolidation to lower monthly payments after graduation.