Have you asked yourself, “Should I consolidate my student loans?” If you have student loans, then you probably have. But it can be hard to know what the right answer is.
Consolidation is one of those words that conjures images of simplicity, organization, and perhaps even post-clutter serenity. Instead of a mess of bills, a mess of belongings, or a mess of life, you can simply consolidate and deal with less. In the case of student loans, consolidation means you can deal with fewer creditors, and with paying less interest over the life of your loan.
Sounds pretty good, right?
However, before you jump on board, you should know that there are some situations where consolidating student loans may not leave you with post-clutter bliss. As with everything else in life, there are pros and cons to consider. Below, let’s take a look at reasons to consolidate and reasons not to consolidate. I’ll also share my own experience in consolidating my student loans.
Reasons For Consolidating Your Student Loans
There are several reasons why you may want to consolidate your student loans. For one, consolidating student loans simplifies your debt repayment process. Instead of lots of lenders to deal with, all with varying deadlines, you can deal with one lender and one lump sum of debt. Even if you have several federal student loans and several private loans, you could consolidate the federal loans together, and then consolidate the private loans together, leaving you with only two lenders and two piles of debt to deal with (you cannot typically consolidate federal student loans with private student loans).
A second and very common reason to consolidate your student loans is to take advantage of lower interest rates. You can lock in a fixed, lower interest rate for the life of the loan and not have to worry about rate hikes over the years.
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A third reason that applies to some people is the desire to lower their monthly payments. Sometimes consolidating your student loans will allow you to get a lower total monthly payment (although this can also lead to a longer repayment term). If you’re in need of lower monthly payments, consult with your lender and also check out this Student Loan Debt resource center.
Reasons to Be Wary of Consolidating Your Student Loans
For the reasons stated above, you may be tempted to take a lower interest rate in exchange for paying on the loan for many more years than the original loan repayment period. In situations where you do not have employment, or otherwise do not have money, this could be a great option for you so that you don’t find yourself in forbearance in the short-term. However, you’d need to look at the long-term implications of extending your loan repayment period.
A crucial question to ask during any consolidation consultation is how much interest you will be paying over the length of the loan repayment period for each of the options they are presenting to you.
You should also be aware that when you consolidate a student loan you often lose any lender benefits from the previous loans. For example, lender benefits I received from my original student loans included a 0.25% interest rate deduction if I scheduled automatic payments (check!), and a 1% interest rate deduction after making 36 on-time and consistent payments (check!). Had I consolidated with a different lender, then these benefits would have gone away.
Finally, ensure that your new interest rate is lower than your current interest rate. This is usually the main point of consolidating loans, and one that could greatly help accelerate your debt repayment. If you wrap several loans together and one has a high interest rate to begin with, it could end up making the interest rate for the consolidation loan higher than necessary — and cost you money. Also, if you happen to lock in a certain interest rate via consolidation and later realize that you could have gotten a lower rate, it will probably be too late to change course.
My Student Loan Debt Consolidation Experience
I graduated college in 2005 with $36,000 in debt. My student loans were comprised of both subsidized federal loans and private loans. During my exit interview with my college’s financial aid office, I learned that I had a basket of seven different loans and would need to make four different payments each month. Here was the breakdown:
- Perkins Loan: $4200, 5% interest rate, $44.77 monthly payment
- Federal Loans, Subsidized: $21,800, various interest rates (2.82%, 2.77%, 4.7%, 5.39% and 3.46%), $250 approximate monthly payment
- Private Signature Student Loan: $6000, 9.0% interest, could not find the monthly payment amount in my records
- Loan from Grandfather: $4,000, no interest, $100 monthly payment
In an attempt to accelerate the eleven years of payments Sallie Mae thought I should make (with $15,000+ worth of interest going into their pockets in the process), I started to strategize my loan payoff. The first loan I decided to pay off in full was a federal Stafford Loan for $2,500 at 4.7% interest.
Several months and many postage stamps after graduation, I got frustrated with the number of checks I had to write out each month (and the number of deadlines I had to keep track of in my head). At around the same time I saw an advertisement for student loan debt consolidation. The interest rate being offered was lower than most of my loans, and I was intrigued.
A woman I spoke with on the phone helped me determine which loans I could consolidate, and which ones I could not. On top of that, it was in my favor to not consolidate certain loans due to their high interest rate affecting the overall lump sum of loans. Through the Federal Loan Consolidation Program, I was able to consolidate $17,125 loan at an incredible 2.625% interest rate. What a deal! My new monthly payment for these loans was $117.51.
After receiving two years of tax deductions totaling over $1,000 in interest I had paid, I decided that I needed to hack off the private student loan of $6,000 at 9% interest next. I paid the minimum payments on the larger, consolidated loan and threw extra money at the $6,000 private loan with the highest interest rate until it was paid off. After that was paid off, I then paid $250 per month on the rest of the student loans.
Interest Rate Strategy in Consolidating Your Loans
After carefully considering the pros and cons, if you are interested in consolidating your student loans there is one more thing to consider: your strategy. The interest rate you will be given is going to be based on all of the interest rates on the loans that you currently have, so be sure to work with the student loan debt consolidator in finding the best formula of debt consolidation.
What do I mean by this? If you have four federal student loans with interest rates at around 3%, and one with an interest rate of 6%, then you might not want to consolidate the 6% interest rate loan in with the others as it will increase the rate on the bigger lump of debt. Instead, pay the minimum on the consolidated sum of debt and turn your energy towards eradicating the unconsolidated loan.
Hopefully this has been helpful for those of you wondering “Should I consolidate my student loans?” If you have any specific questions, feel free to post them in the comments below!
Image credit: zimmytws