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How Do Student Loan Consolidation Companies Make Money?

student loan consolidation

Nowadays almost every student borrows money through student loans to pay their education costs, yet find themselves in challenging condition to repay their debt. Student loan debt can be overwhelming, and stressful to pay for the borrower especially when the borrower has several student loans. Approximately 38% of borrowers face difficulties to repay different monthly payments. Therefore most of the borrowers benefit from student loan consolidation to combine all their loans into the single one. Student loan consolidation companies offer suitable conditions for borrowers to simplify their repayment process. However, it is not evident for many these companies make money from federal student loans. In this article, you are going to learn how consolidation companies help borrowers to repay their debt and make a profit through federal student loans.


What is student loan consolidation?

student loan consolidation

One of the easiest and convenient ways for students to pay their education cost is to take a student loan, and most of the time they oblige to borrow money from different student loans. However, after graduation face problems while repaying their debt. Student loan consolidation allows borrowers to consolidate their loans into one single monthly payment method with a fixed interest rate. After your consolidation is complete, you will confirm consolidated loans and pay monthly direct consolidation loan.  Student debt consolidation is especially beneficial for borrowers who suffer from several monthly paperwork, payments and try to find a more convenient way to repay their debts. But how student loan consolidation companies that help students to combine their loan make money?

Most of the claim themselves as non-profit organizations yet it is known by most of us that these companies make a profit in different ways. Some of them charge percentage from the payments, yet others keep first or second payments as the “administration cost.” Here is a breakdown of how these companies help borrowers and make a profit at the same time.

Student debt consolidation is a convenient methodology for borrowers in terms of combining their several monthly payments into the single one. Additionally, it helps them to reduce the amount of paperwork, and statements.  It is a proven way of canceling your student debts without dealing with the several repayments separately. On the other hand, debt consolidation could be risky as once borrower’s loans are consolidated they no longer have control over how their payment is handled. As a result, your debt may end with even more extended payments and also with high – interest rates.


Federal Loans as their Rival

Although there exist many loan consolidation companies that offer consolidating student loan their biggest rival is the federal government. The Federal government is owed approximately $1.4 trillion for student loans. Additionally, the federal government treats each student equally, and it does not matter for it whether you are an undergraduate student or graduate. The interest rate for both graduate and the undergraduate student will be the same. In contrast, according to private sector student debt consolidation companies, student’s ability to pay and credit score is an essential part of deciding their interest rates. Consolidation companies provide a lower interest rate to the borrowers who demonstrate the ability to repay their student loan based on their credit score and income.  


Competition among different consolidation companies

student loan consolidation


Another factor that impacts the interest rate of debt is the competition among student loan consolidation companies. When first these companies were established they did not worry about decided interest rates. However, recently the number of consolidation companies have been increased, and the marketplace for the consolidation companies has become crowded, it also impacted the interest rates of student debts. Most of the companies have obliged to offer a lower interest rate to become more competitive against their peers.


How does it affect borrowers?

Increase in the number of consolidation companies leads to the confusion among borrowers as they find themselves in the challenging position to decide their consolidation company. In that case, the borrower should investigate a lot about consolidation companies and find out which company offer the best interest rate. Additionally, there exist many online sources that borrower can get detailed information from both experts and borrowers toward the specific consolidation company.

It is always the best option to search the specific consolidation company name in the search and read the reviews about that company. You can search for the company profile on the Better Business Bureau website. If the company is rated as A+ on the website usually can be considered as a reliable one. Next step could be comparing and contrasting gained information about each company. In that stage, the companies that avoid providing detailed information about the process and give minimal data to the customer should be eliminated. Always keep in mind to get information about the interest rate, repayment process, and monthly payments. Then after that focus on comparing different consolidation companies.


How do consolidation companies work?

student loan consolidation

These companies offer borrowers the best options to budget their resources at the same time providing them different ways to eliminate their debt. These companies firstly work for the benefit of their customers not for their interest as most of them try to offer the lowest interest rate for their services. Most of these companies target to find borrowers with lower risks and higher interest rates.

Borrowers usually prefer to consolidate their loans with consolidation companies rather than federal government as the federal government treats each borrower equally. Consolidation companies treat each borrower uniquely and offer specialized treatment for each of them.  These consolidation companies make appropriate arrangements, consult with debtors to help them to make affordable monthly payments and cancel their loan within a minimal time.

To have a clear understanding of how these companies make money let’s imagine an example. Consider you owe $20.000 debt on your credit cards and you consolidate your loans with one of the consolidation companies. One of the options for a consolidation company to make a profit will be through “voluntary contribution.” In other words, your initial one or two payments will be given to the company as a voluntary contribution and additionally, each month approximately 10% of your payments will be collected as continuous voluntary payment.  


How to consolidate your loans?

After investigating and finding the most suitable consolidation company for your requirement the next step is contacting with one of the company members personally or online and describing your situation. The counselor will review your financial status and offer you a free way to consolidate your loan and cancel your debt in a minimal amount of time. After you authorize a consolidation company to consolidate your loans, you will receive a schedule about your exact monthly payments based on your credit debts and income.

To conclude, student loan consolidation has become one of the biggest marketplaces and there exist many companies that offer borrowers to consolidate their federal student loans. It is always recommended for borrowers to keep in mind that these companies are businesses to make money, even if their status is non-profit. Always try to investigate more about the companies before consolidating your loans and select a consolidation company that offers minimum interest rate not to face additional problems in the future.