If you’re starting to look into buying a house, you already have an eye to your financial realities. You know decreasing your debt load will help with securing a mortgage, so you begin to explore ways of doing that.
Loan consolidation seems like an obvious choice for helping your financial situation. While it can offer benefits, particularly in the case of consumer debt or private loans, student loan consolidation should be considered carefully, as there are some drawbacks you might not be aware of.
What Is Student Loan Consolidation?
In order to finance your education, you may have taken a mixture of public loans out from both the federal and provincial governments and private loans from a bank. Consolidation rolls the balances into one, typically with a fixed interest rate. (Not all loans qualify for consolidation, make sure to check first.) The interest rate is determined by averaging the rates of your various loans, rounded up.
Depending on which province you live in, your government loans may have automatically been consolidated when you finished schooling.
Reasons To Consolidate
- Fixed interest rate. If you have older loans with variable interest rates it might be helpful to get them fixed at one rate.
- Ease of payment. If you have loans from multiple places, keeping track of them can be confusing and result in missed payments if you aren’t careful. Consolidating would alleviate that concern.
- More time. If you are struggling to make your payments, consolidating with a longer repayment period will result in lower payments (though you’ll pay more in interest over the life of the loan).
Reasons Not To Consolidate
- Lost tax benefit. Student loans are a special class of loan that allow you to deduct the interest payments on your taxes. If you consolidate them using a bank or private lender, they will no longer be classified as student loans, disqualifying you from the tax break.
- Doesn’t reduce payments. Because the rate is averaged (and rounded up) from your original loans, you typically won’t save money by getting a lower interest rate. (You could if you refinanced the loans, which is different than consolidation.) Also consider that you will end up paying more if you extend your repayment period.
- Disqualifies some loan forgiveness. If you are in a loan forgiveness program contingent on your employment and have put in years’ worth of repayment already, consolidating starts the clock over on your forgiveness timeline.
- Lost assistance programs. If some loans qualify for assistance but others, like private bank loans, do not, you could disqualify the consolidated loan from assistance because of the ineligible loans that have been rolled in. This is similar to losing your tax benefit.
Speak to an independent financial advisor about your options for the safest, quickest and cheapest ways to repay your loans. It may make sense to carry several small loans at once as long as you are careful to pay them with the right amounts on time each month. If you are already in default or have exhausted your options for government assistance, it may make sense to consolidate with a private lender and extend the loan repayment period.
Refinancing
We mentioned above that refinancing is not the same thing as consolidation. Instead, it allows you to consolidate federal loans with private loans through a private lender, like a bank. This means you would lose your tax benefit and government assistance qualification, however you’d be able to get a lower interest rate or an extended term, which could save you money and/or lower your monthly payments.
Refinancing is sometimes discussed when you have a mortgage already and you want to borrow against your home’s equity. This is not generally recommended. However, if you are looking into refinancing or are on your way to owning a home, you may wish to consider mortgage life insurance to protect your investment.
20/20 Mortgage Life Insurance will pay your designated beneficiary for the remaining value of your mortgage in the event of premature death. To learn more, see how mortgage life insurance works.
Contact Us
If you’re interested in learning more about mortgage life insurance or how it could help you reach your goals, fill out our easy online contact form and we’ll be happy to discuss your options and answer questions.
