I have way too much student debt. Can I consolidate my loans?

There are a few questions that people write to me frequently about. Here are some of them:

• What do I do about all my student loans?
• Can I consolidate them?
• What does that even mean?
• Will I pay less or more?
• Is this permissible for me as a Muslim?

What is Debt Consolidation?

Debt consolidation is “the combining of several unsecured debts into a single, new loan that is more favorable.” In laymen’s terms, all the different loans that you are paying money on will be rolled into one big one, and you’ll make one payment.

That payment will usually be lower than your previous payments and you may get a lower interest rate as well. However, there are some additional considerations to make before agreeing to consolidate your loans.

Should I consolidate my loans?

Loan consolidation can simplify your finances in the short term, but may complicate things in the long term. If you consolidate your loans your loan term may be (probably will be) extended. What this means is that although your monthly payments are lower, you may end up paying more interest in the long run.

You should consider whether or not this is going to cost you more in the long run if you consolidate or not. Use this calculator to see if this may happen or not. There are other considerations that you MUST keep in mind. If you consolidate your loans you may not be eligible for interest rates discounts, pre-payment of principal (which would lessen your interest payments), and some loan cancellation benefits.

Which Loans Can I Consolidate?

Most federal student loans can be consolidated, but not if you are in default. In order to consolidate loans, you cannot be in default and have to meet particular stipulations to be able to consolidate them later.

Is Loan Consolidation a valid option for Muslims?

Riba is forbidden, and unsecured loans are (in the opinion of the majority of scholars) included in forbidden Riba. Nonetheless, it is important not to disregard your outstanding loans just because you now believe them to be forbidden. You still have the obligation to pay them back, but you also have the obligation to lessen the negative effects that repayment will have on your financial stability. Using Loan Consolidation may help you, if it makes your interest payments less and allows you to repay/absolve yourself of all or part of the interest you owe. Another option you need to look into is loan deferment or forbearance.

The Sharia principles here to keep in mind are “When you can not obtain something entirely, it should not be left off completely” (?? ?? ???? ??? ?? ???? ???) and “Lessening evil as much as possible is an essential value of the Sharia” (????? ???? ?? ???? ??? ?????? ??????). If consolidating your loans will allow you to breathe easier, pay less interest, and gain a semblance of financial stability then it may be a good option for you and is completely valid for you to do. Consult with a licensed financial advisor or CPA to see if this is a good option for you.

 

Resources:

• How To Consolidate Student Loans – Debt.org http://www.debt.org/students/loan-consolidation/
• Loan Consolidation – Federal Student Aid, U.S. Dept. of Education https://studentaid.ed.gov/repay-loans/consolidation
• Debt Consolidation – Investopedia http://www.investopedia.com/terms/d/debtconsolidation.asp