A Private Hell: How The Hell Do You Refinance Private Student Loans?
Everyone knows you can slash payments on public student loans. Here are the secrets for private loans.
Build a debt consolidation strategy that works in today’s economy
There are debt consolidation solutions for credit card debt, federal and private student loans and back taxes. Consolidation isn’t typically used for secured loans, such as your mortgage or auto loan. Most unsecured types of debt – i.e. debts without collateral – can be consolidated.
In addition, you typically can only consolidate similar types of debt together. So, the consolidation plan you use for credit card debt would be separate from the one you use for student loans. And within student loans, some options only apply specifically to federal student loans.
With credit card debt consolidation, you can usually include unsecured personal loans, unpaid medical bills and even some payday loans in consolidation. However, this varies based on which consolidation solution you use.
In other words, although debt consolidation can be a highly effective way to eliminate debt, it won’t work in every situation. In fact, if you use consolidation in the wrong circumstances, you can end up making your situation worse.
Here’s an example, let’s say you open a balance transfer credit card to consolidate your existing credit card debt. You will enjoy 0% APR for an introductory period right after you open the card. It lasts for 6-24 months, depending on your credit score. This allows you to eliminate debt interest-free.
However, if you don’t pay off the consolidated balance before the promotional period ends, you’re back to high interest charges. In many cases, the standard rate for balance transfers may be higher that the rates you had previously.
Always make sure that you have a credit score high enough to qualify for the rate you need to get relief. Also, make sure you can afford the monthly payments to successfully complete the plan your set out.
If you consolidate your debt and then run into trouble with repayment, you can usually re-consolidate. For instance, you can include credit card debt consolidation loans in a debt management program. You can also consolidate existing Federal Direct Consolidation Loans with a new loan or include them in a private consolidation loan.
The only type of debt where re-consolidation is frowned is tax debt. Once you consolidate multiple years of back taxes with an Installment Agreement (IA), the IRS expects you to stick to that agreement. It’s possible to re-consolidate with a new IA, but you may face additional penalties.
One of the main goals with many types of debt consolidation is to reduce or eliminate interest charges. By lowering APR, you can accelerate how fast you can get out of debt, and because you pay what you owe in a more efficient way, you may even enjoy lower payments, too. This is the case with all forms of credit card debt consolidation, as well as private student loan consolidation.
However, this goal does not apply to federal student loan consolidation or tax debt. If you use a Federal Direct Consolidation Loan, they set the interest rate by taking a weighted average of your existing rates. So, the consolidated rate will be lower than some of your previous rate, but higher than others. With tax debt consolidation, any penalty interest that’s applied will generally remain unless you also go through penalty abatement.
Although some debt relief options like debt settlement damage your credit, consolidation usually doesn’t. In most cases, if you complete a consolidation plan successfully, you won’t hurt your credit score. In fact, consolidation usually improves people’s credit scores because it improves the two biggest factors used to calculate scores.
A common mistake that people make with consolidation – particularly for credit card debt – is that they take on new debt too early. Here’s an example:
Let’s say you consolidate your credit card balances using a personal consolidation loan. This means you take out a low-interest loan, using the funds you receive to pay off all your credit card balances. That leaves only the low-interest loan to repay.
However, this creates the potential for you to quickly take on a large volume of new debt. All your account balances are zeroed out. It can be really tempting to start charging again. But remember, the reason you consolidated is that you were having trouble paying off those balances. Running them up now means you wind up with the loan plus the new balances. You can end up with more debt to pay off, instead of getting closer to zero.
By law, you’re allowed to download free copies (no strings attached) of your credit report once every twelve months. You can get them through annualcreditreport.com. Once you finishing paying off your consolidated debt, you should review your reports thoroughly. Here is what you’re looking for: