Is student loan consolidation a scam and should one do it soon before rates go up?
I am hearing that rates are going up considerably on student loans and that everyone should consolidate to lock in a lower rate. I am not sure though, because I get to deduct the interest on that loan every tax year and my rate is currently under 5%.
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6 Responses to “Is student loan consolidation a scam and should one do it soon before rates go up?”
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You should consolidate, since rates will be going up to 7% or higher. The interest is deductible, but you’re still paying more with higher interest rates. Say you’re in the 25% tax bracket, and have $10,000 in loans. At 5%, you pay $500 in interest. The tax deduction on the interest comes out to $125, so you’ve paid $375. At 7%, you pay $700 in interest, the tax deduction is $175, you’ve paid $525. The worse the interest rate gets, the more (net) you’ll have to pay.
Rates will be going up on about 1.5% on July 1. All stafford loans after July 1 are at a fixed rate of 6.8%.
I guess you would have to calculate if your tax savings are greater than the interest you will save. (I doubt they are).
I wouldn’t call it a scam per se. Just like anything else we do in life, do your homework on it before you jump into it. Rates ARE going up by 1.5% (I think in July). And you would be able to deduct the interest on your consolidated loan as it is still classified as an educational loan (what it was orginally intended for). Just make sure whoever you decide to lock in your rate with offers you a good percentage and doesn’t have any extraneous fees. Good luck!
It is NOT a scam – it’s actually one of the few times, to heed what you hear. You need to lock in the current rate. Why pay a higher interest when you don’t have to?
Consolidate. It locks in your loans at a lower rate. Especially since the rates are going up. If you choose to concolidate later, it makes you rates go up. You still get to deduct your interest. You will still have to pay interest (the savings on the interest is a lot more than the tax break). the consolidation is based on the various rates from when you took out the loans. Make sure you concolidate with someone reputable (like the government). Lots of student loan companies are getting nailed for scams right now.I locked in last year and then did the direct withdrawl, so my interest is 2.75%. Which is great cuz I was in school for 8 years. You probably don’t want to consolidate if you still have more school, or if you have already used up the grace period for some of your loans but not all (that will make you loose all grace time). Talk to a school loan rep to see what would work best for you.
I will say that I am sooooooo glad I did it.
Student loan consolidation is definitely not a scam. If you’ve got student loans and are eligbile to consolidate them, I suggest you do so:
~ Interest is still tax deductible (see See IRS Publication 970 for more details.)
~ Depending upon the interest rates on each of your individual student loans, you may be able to lower your overall interest rate. The interest rate on a consolidation loan will be calculated according to the weighted average of the interest rates on the loans you choose to consolidate, rounded up to the nearest 1/8th of one percent or 8.25%, whichever is less. So if you have one loan under 5%, but have others over that, it may be better for you to consolidate all of your student loans in to one payment.
~ Many student loan consolidation companies offer "borrower benefits" as mentioned in other answers to your question. These benefits, or incentives, such as .25% for auto-debit and 1.00% after a certain number of on-time payments, can lower your interest rate even more.
If you’re still not sure, take the time to speak with several consolidation companies. However, do it before July 1st so that if you decide to consolidate, you’ll get the lower interest rates.