Don't Plan to Consolidate Debt

Posted by: Meredith K. | Dec 22,2007


Thursday I wrote about how college students might rationalize going into debt during college because they see everyone around them doing the same.  My aim here is to help students deal with their credit card debt they’ve accrued during and after college.  Today I want to touch on the prospect of getting a debt consolidation loan.  

Only I thought that this might be with a similar reaction to the post about peer pressure.  I write about debt consolidation and the enterprising student reads it and thinks, “Great!  I’ll just consolidate my loans after graduation!  Let’s go shopping!”  Debt consolidation is something to do as a fall back plan, not something to aspire to.  While it can help you manage your funds, it can also damage your credit rating.  

The reason that you’d want to enter into a debt consolidation plan is that you have so many outstanding debts that you cannot pay them off one at a time.  Consolidation is the process of applying for one major loan which pays off existing debts.  You then pay off only the one consolidation loan, potentially for a lower interest rate and less money than your combined debt burden.  The catch is that it can be difficult for a grad with a high debt burden to get a loan with rates that justify the loan.  You could actually end up paying more for the loan than the debts individually.  

Some consolidation programs aren’t loan-based but instead are a form of negotiation.  The debt negotiator agrees to contact your creditors and reduce your interest rates.  Unfortunately there are some crooked counselors out there who will promise one thing and not deliver.  You’ve paid for a service that has accomplished nothing.  

This is not to say that debt consolidation is useless, but to consider it a safe avenue and to use it to justify racking up huge debt is unwise.  Even if it works, it ends up on your credit rating, further damaging a rating that may have been tanking already.  

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