Have you considered using a bank loan to pay off your student loans?

Have you considered using a bank loan to pay off your student loans?

Federal student loan consolidation program vs. A regular bank loan

There are several different ways to address a defaulted student loans debt.  One of the quickest methods is to take out a bank loan for the total amount, and pay off the student loan in one lump sum.    As with any debt management style or technique, there are upsides and downsides to consider.  However, make no mistake about it; your loan organization will take measures to deal with non-payment, whether they are federal or private.

At the forefront of the student loan debt issue there are two positives to consider, one from each side of the table, so to speak.  A federal loan consolidation program will actually work with you to determine a suitable payment amount and schedule.  This is a clear benefit over loans handed out from private institutions, which will expect immediate and timely repayment without fail.  On the other hand, private institutions cannot do things like, garnish your wages or withhold your tax refund either.  In other words, both plans have their pros and cons to carefully consider before you jump to any conclusions.

One of the potential downsides to simply taking out a private bank loan to cover student loans is how this might negatively affect your credit rating.  What do you get when you combine a poor credit rating with an extremely long period of repayment? A situation that may prevent you from getting a home loan or financing a new car, that’s what.   So before you sign or agree to anything, be sure to discuss the effects that a loan might have on your credit rating with your loan officer.  If your loan officer promises that your credit rating won’t be negatively impacted, get it in writing.

On the other hand, sticking with a federal loan consolidation program might mean higher payment amounts, wage garnishments, tax refund withholding’s, negative credit impacts, and having to live a frugal existence for up to 10 or so years.  Some individuals like the idea of getting out of debt as quickly as possible and there’s no question, it makes perfect sense.  But others simply don’t see the incentive to essentially give up their financial freedom for up to 10 or more years to pay down a debt; they would rather comfortably enjoy themselves during that time instead.

It should also come as no surprise to anyone that the interest rates associated with a private bank are going to be a little higher than those of the federal loan program.   One should also keep in mind that private institutions will most likely require you to put some form of collateral in order to receive your loan.  So if you miss payments, you could lose your possessions.

Carefully weigh the pros and cons of each debt repayment method before choosing the plan that works for you.  Most people will tell you flat out that you should avoid private loan / debt management organizations; this is only because they realize that the total amount you may spend in the end may be much greater than by sticking with the federal system.  However, some people are more than willing to extend the length of their repayment period (or perhaps agree to a slight increase in interest rate) if it means that their standard of living over a 10 year period will not be sacrificed.  In the end it all comes down to personal preference, what your goals are, and how stable you can be with your monthly payments.