Should You Consolidate Student Loans Or Pay Them Off?

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Second only to the mortgage, the student loan is the American debt of choice.  Only a few loans are righteous enough to carry the title – good.  A student loan is typically one such loan. 

As a result, people often like consolidating mortgages and consolidating student loans. 

The negative result is that the student loan becomes not just a part of life, but a part of who we are.  Quite simply, we get comfortable with the student loan.  On the debt emotional scale, the student loan causes little friction and little discomfort.

Why Are We Comfortable With Student Loans?

Student loans typically carry low interest rates.

Student loans can be deferred – when the going gets tough, the debt can be put on the back burner.  You can defer your student loan if you are having an economic hardship, going back to school, or if you are unemployed.  Yet, you will have those student loans until you die as they are extremely rare to bankrupt. 

You get something valuable in return when you borrow money for school.  Typically a degree.  Often great memories.  Occasionally, a spouse. 

The Dangers of Student Loan Consolidation

The greatest danger of a student loan consolidation is that it often means the student loan becomes even less of a priority.  Our goal here is to keep it as a priority, not to let it get buried so we end up paying on it for the next 20 years.

Nevertheless, because so many people do consolidate student loans, I want to help you make the process as painless and profitable as possible.

5 Tips for Successfully Consolidating a Student Loan

  1. Do your homework.  The student debt loan consolidation industry is extremely aggressive.  They are sales oriented and talented at doing what they are paid to do.  You need to know your situation and understand your options before you even have a student loan debt consolidation discussion with an employee of a debt consolidation company. 
  2. Forget the fancy footwork.  Been there done that (see below).  Many loan consolidation companies have so many choices and offerings to make you think you’re getting a great deal.  However, you need to run the numbers yourself.  The basic plan is almost always the best.
  3. Don’t decrease your payment amount or increase the term lengthYou’re financially moving in the wrong direction if you start paying less on your loans. Your goals should be to pay more.  Let them reduce the interest, but keep the payment amount consistent.
  4. Verify everything with a third party.  After having a conversation with a debt consolidation company, go to the library, search online, or find a financial mentor.  Test everything yourself to see if what they said works for you and your situation. 
  5. Compare different companies and different options.  You don’t need to consolidate with the first company you find.  Don’t be afraid to shop around and see if you can’t find a better interest rate on your consolidation.

It is Not A Mistake If you Don’t Consolidate Your Student Loan Debt

Several months ago, I was talking with a friend and we found out we did the exact same thing in our approach to student loans.  The worst part was that both of us were motivated to do it because others either said or insinuated we were idiots if we didn’t consolidate our student loans.

So what did we do?  Well, we had the money to pay off our student loans, but because they are so versatile and have such low rates, we held onto both our money and our loans.  We were told that is what smart people do. 

The worst part is that even when we had the cash to pay off our student loan debt, we both consolidated them. 

To make matters worse, my friend said for several years he was emotionally unsettled with the decision (to consolidate and hold on to the debt), but felt afraid to pay it off because people would criticize his decision.  He struggled, because of debt allergies, but kept doing what other people said was right. 

Over a period of about 1-2 years of sitting on the money, instead of paying off the loan, we actually ended up losing some money by holding on to the debt.  Honestly, my memory is vague, but somehow we got charged several hundred dollars (either in interest or fees) that I didn’t anticipate when we did the student loan consolidation.  A month after the consolidation, I realized that I was being a fool for holding on to the student loans so I just paid them off.  I had an emergency fund in place so why would I need access to my student loan funds?  So much for all that great advice.

Six Advantages of Paying Off Your Student Loans Instead of Consolidating

  1. A student loan debt is just that – a debt. Why keep debt around for no apparent reason?
  2. You can focus your full attention on saving up for a down payment and buying your first house.
  3. Relief from debt allergies.
  4. Don’t have a deceptive financial situation.  Lots of folks have $10,000 in the bank and $15,000 in student loans and they think they have $10,000. The reality is that they have negative $5,000.
  5. You went to school to make money, not spend the next 10 years getting further and further in debt.
  6. You don’t have to deal with anyone who wants you to pay them money. You can be debt free.

What are your thoughts on student loan consolidation?  Did you/are you holding on to a student loan for no apparent reason?

Comments

  1. says

    I haven’t heard a lot of people advocate sitting on cash while not paying off a student loan. From what I’ve seen (and this is what my wife and I do), the advice is typically to invest the money at a higher return.

    Depending upon the rate of the loans in question (my wife’s are fixed at 2.48%), you can get a higher return without taking on any risk.
    .-= Mike Piper´s last blog ..Renters Insurance: Cost and Tips on Buying =-.

    • says

      @Mike
      The advice I had was to use it as a bonus emergency fund. Hold on to it because you don’t know when you might need it.
      In my case I’m glad I just paid it off.

  2. says

    I have a student loan that we’re paying off now. I’m actually going to get a part time job and knock it off this year. We own a home and we don’t want to pull money from savings/401K/etc to pay it, since we don’t know what will come up in the future. We’re already having a leaky window being repaired and had the vents cleaned out in the first 7 months of owning the home.
    .-= lencib: Falling into Favor´s last blog ..The Mary Example =-.

  3. Dee says

    I know this article was probably written for the average Joe getting a job out of college but from a financial perspective it needs some tuning up. For example, I run an online retail business where on $10,000 I can get about a 15%-20% return a month turning inventory over which equates to $1500-$2000. That’s several hundred dollars on top of the loan payment. If you just give up that $10,000, that shuts that whole operation down. Also, if you’re a business person wanting to start a business, equity is so very precious at first. If someone has money in the bank they shouldn’t be saving it, they shouldn’t be blowing it all on paying off a loan at once, they need to be finding ways to generate capital at a faster rate than the terms of the loan.

  4. says

    Well, I am not against the student loan consolidation, but I see a lot more advantages in paying student loans off. Anyway, a debt is always a debt and sooner or later there will come time to pay it off. I believe that the best way for becoming debt-free is paying down all the debts. All these option that make paying off the debt a little easier maybe good and efficient, but paying down the debt is a debt to a financial freedom. Before bying a car or a house you will have no need to think that you already have a student loan debt and you need to pay it off. That’s why it’s better to say the debts “goodbye” as soon as it possible, save money and buy the things you have dreamed about.

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