Personal Finance Tip of the Week, By Financial Fundamentals, LLC of Watertown

If you have student loans, odds are that you have seen or received an offer to refinance them. It’s a growing industry that is being built up in response to the record amount of debt held by current and former students.

The federal government has offered a basic refinancing option for a while, called consolidation. It doesn’t reduce your interest rate, but can simplify your bill paying process and make you eligible for certain loan forgiveness options. As I’ve mentioned before, it’s important to carefully consider the consequences of federal loan consolidation before you make any decisions. (See these two blog posts for details: one, two.)

What’s newer and growing is the industry to provide private loan consolidation and refinancing services. The firms in this industry take different forms: lending firms that provide new loans themselves, middle-men that connect you with lending firms, and service firms that consolidate federal loans for you, for example.

Regardless of the form they take, you should carefully evaluate what you are getting and giving up. This may require some digging on your part, since ads typically only highlight what you are getting.

For example, if you refinance your federal loans into a private loan, you will give up important federal protections and benefits, which may be more valuable to you than a lower interest rate. You may also pay sizable fees on top of the fees you already paid when you originated your loans.

Also be aware that some practices in this industry are predatory. I recently encountered a service firm that offered to consolidate federal loans (something you can do for free) and charged $500 per year for the service. The fees were only revealed in the fine print of the contract.

Don’t assume that these firms are student loan experts or have your best interests in mind. Protect yourself by doing your own independent research and asking lots of questions. Only proceed once you fully understand the pros and cons. As always, also feel free to contact me if you would like a second opinion.

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Stephen Barkhuff, CFP(R), CFA is the founder and president of Financial Fundamentals, LLC, based in Watertown, MA. Financial Fundamentals helps couples and singles with modest incomes take control of their financial future. Please feel free to email him any questions or comments.