With interest rate increasing over 2-3% for variable rate Federal student loans (e.g. Stafford), student loan consolidation should be a no-brainer for most people. You have until July 1st to consolidate your student loan; if you missed out on last year’s ridiculously low-rate, here’s your second chance (you lazy bastard).

The real question, though, isn’t “Should I consolidate?” It’s “Who Should I choose?”

The easy answer: your current lender. You’ve chosen your current lender for a reason, there’s no reason to complicate things further by going with a different lender. However, the problem with the easy answer is, you may have chosen the wrong lender in the first place, or, get this—there may be better lenders out there.

FACT: The only differences between federal student loan consolidation lenders are: Lender Repayment Incentives and Lender Service. Don’t underestimate their importance.

If you currently have a federal student loan for yourself or your child, you’ve no doubt received many solicitation from different lenders to get you to consolidate your loans to them. Many of these will tout some type incentive programs. Common repayment incentives are along the lines of reduction off in interest rate, after a certain amount of timely repayment.

Example: After 36 months of consecutive [timely] payment on your 10 year loan, you receive a 1% discount from your loan.

This typical type of lender incentive sounds great enough, but the problem is, many borrowers fail to qualify for the incentive program. Many of these incentive offers require timely monthly payment, so if you miss a payment deadline before reaching the required payment term, you won’t receive the rate deduction bonus. The same applies if you miss a payment deadline after earning your bonus.

In comes a different type of incentive program: immediate interest rate deduction if you sign up for auto debit, with additional deduction after consecutive payment.

Example: You receive a 0.5% interest rate deduction if you sign up to have your monthly loan payments automatically withdrawn from your checking account. Plus, after 24 months of consecutive on-time payment, you receive an additional 1.25% deduction in your interest rate.

A much nicer incentive, right? The above example is from ELC, which unfortunately has a minimum of $20,000 for their 1.25% deduction. If you only have a $10,000 loan, you’re out of luck on the additional interest deduction. Thus, it’s important to compare the offers and figure out which programs you can actually qualify.

As mentioned above, the second difference amidst the sea of lenders are lender services. Even if the incentive program is the best in the world, if the lender has a spotty track record for customer service, you may be doing yourself a disservice by signing up. What happens if you wish to defer your payment? If you call to ask about that, or a general inquiry on your loan, will they respond in a timely matter? For those of us with a low loan amount, lender service may not be a big deal—but for those of us that are in it for the long haul, you’ll want approachable service.

Remember, you can only consolidate once. So if you choose the wrong lender to go with, you’ll be stuck with them untill you pay off your student loan for that private liberal arts university.

Important questions to ask when you’re choosing your lender:

  • What is the repayment incentive?
  • Is there a waiting period for the incentive? Do I have to earn it?
  • What happens if I miss a payment?
  • What happens if I request a deferment?
  • How many of the borrowers actually receive the incentive?
  • Is the lender knowledgeable and experienced?
  • What is the credibility? Does your school support or recommend the lender?
  • How is the accessibility?
  • Are there online account access? A 24/7 customer service number? If you call them, will they give you information tailor to you, or will they give you some generic scripted response?
  • How is their long-term commitment? Does the lender have a history of selling consolidated loan?
  • The worse part in owing money, is when your lender disappears and some other company buys out your loan; suddenly you owe money to someone else.

If you can’t figure out some of these answers with the information provided to you, ask the lenders. This is a great way to gauge their service. If a customer service rep is having a hard time, or trying very little to help you understand their program, it may be a good cue to stay away. If they’re being such a hassle when you’re trying to give them money, imagine when you already owe them the money!

Again, the question to ask isn’t “Should I consolidate?” It’s “Who should I choose?”

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