Graduating from college is an exciting time. After several years of papers, mid-terms, finals and all-nighters, you’re ready to embark on the next stage of your life. Ideally, you already have a fancy new job lined up. For the first time in your life, you’re truly going to be independent. But, of course, there is one concern looming in the distance: student loan payments. If college is the best time of your life, paying back student loans is the very real price. While there are options if you are struggling like student loan consolidation and loan forgiveness, it’s undeniable that Americans are struggling to repay their student loans.
In 2013, the New York Daily News reported that student loan debt had become the second-largest source of personal debt in the United States, exceeding credit cards and car loans and trailing only mortgages. The numbers are quite remarkable. About 40 million borrowers have roughly $1.2 trillion in student loan debt in the United States. Put more simply, the average college graduate is saddled with about $29,000 in student loan debt when they leave campus.
That figure is staggering. Especially when you consider that the average American household earns about $45,000 per year. And with college tuition costs showing no signs of declining, it’s likely future graduates will face the same difficulties. It’s not uncommon for monthly student loan payments to run as high as $300 to $400 per month. And if you attend graduate school, that number will be even higher.
In certain cities, a $400 per month student loan payment is nearly as much as a rent payment and more than a car payment. In lieu of such an exorbitant payment, many students will opt for student loan consolidation to lower their payments.
There are lots of options for student loan consolidation and they’re and some are fairly appealing. The primary appeal is, of course, the reduced payment. Consolidation programs often allow you to enter income-based repayment plans which not only cap your payments but forgive your loans after a certain number of years.
If this sounds very appealing, that’s because it is. It’s an ideal arrangement for young professionals and longtime graduates alike who want to pay off their debts but can’t afford the high payments. Unfortunately, like with anything else in life, there are people out there hoping to take advantage of the poor and under-informed.
Recently, a number of private companies have popped up offering student loan consolidation. These for-profit student loan consolidation companies prepare consolidation applications and submit them to the Department of Education. You may hear about these companies on the radio or they may send you correspondence by mail. And once you do get in contact with them, they’ll sell you on their strong relationship with the Department of Education, their ability to lower your payments and ultimately having your debts forgiven.
At this point, you should be thinking, “What’s the catch?” Well, there certainly is one. After giving you this spiel, they inform you that their services come with a fee (which will be called a processing, consolidation or administrative fee). This fee typically ranges from about $700 to $800. Of course, this is quite a lot of money to hand over all at once. And if you’re struggling to make a $400 payment, $800 is probably not feasible.
But they tell you that they will work with you and allow you to pay the processing fee in four easy installments. At this point, they probably have you hook, line and sinker. While $800 is a lot of money, four installments are certainly manageable. And it’s significantly less than what you’re paying for student loans. So without any further research, you agree to four installments and set up automatic debits to ensure you don’t miss a payment.
And in case you feel hesitant about forking the cash over, these for-profit student loans are sure to recount their many success stories. To get you to sign up, these companies will not hesitate to highlight other clients whose loans they were able to successfully refinance. And they will show you how much you could possibly save as well.
At this point, you’re probably wondering what the problem is. These companies liaise with the Department of Education on your behalf, lower your student loan payments and can even aid you in having your loans forgiven at a certain point. That’s all well and good, but the issue is that not only can you do these things yourself, you can do it for free.
Student loan consolidation works fairly simply. Borrowers will be presented with an inventory of their current federal loans, which can be found on the National Student Loan Data System. From there, they will choose the loans they wish to consolidate. After that, borrowers apply for a Direct Consolidation Loan for free through Sudentloans.Gov in a process that takes about 30 minutes. Once applicants select the loans they want to consolidate, they will choose a loan servicer for their new Direct Consolidation Loan and pick a new repayment plan.
Essentially, these companies are profiting (and pocketing $700 to $800 of your hard-earned dollars) to submit paperwork over three to four months that you could submit yourself in a matter of minutes over the phone or online.
The first thing everyone should know is that federal student loans can only be consolidated through the Federal Direct Consolidation Program. By law, the companies running these clever scams have to tell you that they are not affiliated with the Department of Education. And if they aren’t affiliated with the Department of Education, they are charging you to do something you can do yourself. This is the first sign that a company is running a scam.
Another thing to be aware of is that these companies will often consolidate your loans by entering you into a private loan that is less favorable than your current loan. While this is less common than companies that charge you to file free paperwork, it does happen fairly regularly.
As a recent college grad, you have an assortment of things to worry about without adding student loan consolidation scams to the list. So be aware of whom you are talking to and where your money is going. With some fairly simple research, you can save yourself hundreds of dollars while remaining in good standing with your student loan debts.