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4. Student Loan Debt Consolidation
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Your alternatives: debt consolidation, bankruptcy, or something else?
What are the advantages and disadvantages of student loan debt consolidation? Do I qualify for a debt consolidation loan? Is bankruptcy a better option? - These are the most often asked questions by people with significant student loan debt. To answer them, let's start by emphasizing the fact that student loans are one of the more difficult types of debt to repay, for a number of reasons.
First, you get a student loan when you are a student, which probably means you are young, and may not have the life experience to realize the level of debt you are incurring.
Second, you can only repay a student loan if you get a good job upon graduation. If you don’t get a good job, you may not be able to repay your loan. Finally, a student loan is not dischargeable if you go bankrupt, unless you have been out of school for over 10 years. Since lenders know that you can’t eliminate the loan by filing bankruptcy, it is harder to negotiate favourable payment arrangements with them. |
Since you may not be able to get rid of your student loan by going bankrupt, a student loan debt consolidation may be the correct option.
Advantages and disadvantages of student loan debt consolidation
Some of the advantages of getting a debt consolidation loan to deal with your student loans are as follows:
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By consolidating your government guaranteed student loans with a bank or other lender, you now owe the money to a bank, and not the government. That can be a big advantage, since if you don’t pay your Canada student loan the federal government can seize your tax refunds; the bank cannot seize tax refunds for non-payment.
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It may be possible to negotiate more favourable interest rates with another lender.
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Your credit rating could improve. If you have a negative credit report due to your past due student loans, a debt consolidation loan may allow you to get it back on track and repair your bad credit.
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You may be able to negotiate to pay back your debts over an extended period of time, which could potentially decrease your overall monthly payments.
There are, however, a number of disadvantages to getting a debt consolidation loan to deal with your student loans:
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You may qualify for interest relief as long as your student loan is guaranteed by the government. After consolidation a bank will not give you interest relief.
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Interest on student loans may be tax deductible. Interest on a debt consolidation loan is not tax deductible, so by consolidating you may eliminate the tax breaks associated with a government guaranteed student loan.
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If you have poor credit or a short job history, the interest charged on the loan by the bank may be higher than what you are currently paying.
Clearly there is a number of advantages but also some disadvantages to consolidating your student loans. To decide if this is the correct option for you, talk to your bank to determine what interest rate they will charge, and then you can compare that to what you are currently paying.
Finally, if you find that you don’t qualify for student loan debt consolidation, another option to investigate would be a consumer proposal.
More Information on Debt Consolidation: