A kind reader sent me this mailer they received from Citizens Bank regarding student loan refinance rates.
Granted, it is better than most mailers people send me, but there are some traps to avoid here.
In my opinion, the front of the Citizens Bank student loan consolidation mailer doesn’t do a good job of warning people not to consolidate federal student loans into private student loans. When you do that, you lose access to all sorts of benefits and programs that apply only to federal student loans.
There is a P.S. message, but I can’t figure out what “recent announcement” would apply to their statement.
Unless consumers closely read the fine print on the back of the advertising piece, they may miss the warnings or concerns over consolidating federal student loans.
This mailer was sent to me through my I Buy Junk Mail program. If you have junk mail you’d like to sell, click here. To see other mailers, click here.
The back of the mailer does a better job than most of providing details. There is a lot included here, and the print gets very small.
Some key facts that jumped out at me were
- the maximum rate of the loan can be 21 percent,
- there is a statement that federal loans can be consolidated into a Direct Loan, but it does not provide education or a warning why that is not a smart idea,
- there is a statement that “if you file bankruptcy, you may still be required to pay back this loan.”
It is that last bullet point above that I find most interesting. It does not say that you might not have to pay back this loan if you file bankruptcy. It leaves the reader with a one-sided point of view.
The Consumer Financial Protection Bureau issued an advisory opinion in 2020 about this very topic. In that document, they said, “Questions have arisen regarding whether the refinance and consolidation loans covered by this advisory opinion are “private education loans” under the two conditions set forth in HEOA. The first condition is met because these loans are originated by private education creditors and are not originated or insured by the Federal government or otherwise under title IV of the Higher Education Act of 1965.
Thus, this advisory opinion focuses on whether such loans meet the second condition—that is, are they issued or extended by creditors “expressly for postsecondary educational expenses”?
TILA is silent on the question, and the courts have not considered it. The commentary to Regulation Z states that the phrase “extended expressly [] for postsecondary educational expenses” includes “loans extended to consolidate a consumer’s preexisting private education loans,” but it does not address loans that consolidate existing Federal education loans, nor does it refer to loans that refinance a single existing loan, whether private or Federal.
With respect to consolidation loans, the Bureau believes that TILA and Regulation Z are ambiguous as to whether a loan that consolidates existing Federal education loans is issued or extended “expressly for postsecondary educational expenses to a borrower.”
In other words, it is ambiguous whether the educational purpose of the underlying loans is transferred to the consolidation loan, or if instead the express purpose of the consolidation loan is to manage existing debt, benefit from more favorable interest rates, or some other purpose.”
On the issue of consolidating purely private student loans the CFPB says, “Private consolidation loans combine multiple existing private student loans into one larger loan – you are replacing your original private student loans with this new loan. You will have a single monthly payment for your new private consolidation loan, which may be simpler to keep track of. Private student lenders may offer an interest rate reduction for creditworthy borrowers seeking to consolidate their private student loans. This can save you money over the lifetime of your loan.” – Source
Suppose you do have a Citizens Bank student loan consolidation loan. In that case, you should speak with your bankruptcy attorney to confirm that it is classified as a loan for qualified educational expenses. Otherwise, it might be able to be discharged in bankruptcy.
If you get this or any other offer that is similar, be sure to read the fine print and do your research before just assuming this is a smart move.
A savvy consumer is always careful and prudent.
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Here are some other reasons not to convert a federally insured loans into a private loan.
1. If you become disabled a federally insured loan can be forgiven not so with a private loan
2. A federally insured loan won’t sue but at the most will seek to offset 15% of wages or SS. They won’t touch a pension. And lower income persons can get on income based repayment plan often paying zero dollars per month. Not so with a private loan. They can file a lawsuit if a default and garnish 25% of wages.
3. There are lots of changes being discussed regarding to federally insured loans. Converting to private loans puts you out of the game.
4. It’s easier to protect assets including a home with a federally insured loans. A private loan not so much.