Consolidating student loans

Let’s take a look at a few of the pros and cons of consolidating your student loans. If you have multiple student loans, consolidation can offer some simplicity to your repayment. Essentially what happens when you consolidate is that all of your original loans are paid off by your lender and replaced with a single new loan with new terms. And you can often get a lower monthly payment because you will have a longer repayment period— so there are some trade-offs to keep in mind. Let’s look at an example of getting a federal consolidation loan— you can also get a private consolidation loan if you have private loans, but we’ll get to that in a minute. Let’s say you have fifty thousand dollars in federal loans. Fifteen thousand dollars in subsidized loans at a three point five percent interest rate, and then two different unsubsidized loans: a loan of twenty thousand dollars with a four percent interest rate, and a loan of fifteen thousand dollars with a five percent interest rate. Now as you can see, keeping track of these loans might get complicated— especially if you’re making payments to different loan servicers. Entering these numbers into the loan calculator at studentaid.ed.gov— on a standard ten-year repayment plan, you’re going to be paying a little over five hundred dollars a month. Over ten years, you’ll pay about eleven thousand dollars in interest on your original principal of fifty thousand dollars. Now let’s say you want to consolidate these loans. Under your new loan terms, your loans will be consolidated into one fifty thousand dollar loan— and you’ll have one new fixed interest rate, which is determined by taking the weighted average of the interest rates on your previous loans, and rounding up to the nearest one eighth of one percent. In this case, that’s four point two five percent. Now, entering your loan information into a loan consolidation calculator, you’ll find that consolidating your loans gives you a new repayment period, which is figured based on the amount you owe– the more you owe, the longer this repayment period will be. It can vary from ten to thirty years, but in this case it’s going to be twenty five years. And your new monthly payment will be about two hundred seventy dollars. That’s a lot less than the five hundred dollars a month you would have spent on a standard ten-year repayment plan. But, paying two hundred seventy dollar per month for twenty-five years means you’ll be paying a total of about eighty one thousand two hundred fifty dollars over the life of your loan. Subtract your original fifty thousand dollars, and you’ll see you’re paying over thirty one thousand dollars in interest, compared to the eleven thousand dollars you’d pay on the standard ten-year plan. So while simpler and lower monthly payments might give you some relief in the present, the trade-off is that it can cost you a lot more over time. You'll also have new loan terms. This means that you may miss out on some of the repayment benefits you might have been eligible for on your previous loans, like interest free deferment on subsidized loans or loan cancellation for special circumstances. But if you do decide to consolidate your loans, it's good to keep in mind that you always have the option of paying more than your monthly payment which can save you money over time, while still having the flexibility of not having to make the higher monthly payments that you would have on a standard ten-year plan. But everyone's situation is different. If you're struggling to make payments on your original loans, you might consider repayment options other than loan consolidation, like an income-based repayment plan. Or if you run into a financial hardship and need short-term relief, you might consider deferment or forbearance. Now, if you have private student loans, you also have private loan consolidation options. They work much like a federal consolidation loan, except they also take into account your credit score when determining your interest rate. So if you have a lower credit score, you might be looking at a higher interest rate. If you’ve just left school, you probably haven’t had the chance to build up a good credit history yet, so with private consolidation you might get a simpler, lower monthly payment, but you could end up paying more in combined interest. But if you happen to have a steady job and have built up a good credit score, you might be able to get a lower interest rate from another lender than your current private loans, so it might be worth looking into. So while loan consolidation can make your monthly payments simpler if you have multiple loans with different interest rates, you could end up paying a lot more if you extend your repayment period. But by comparing the pros and cons of each repayment plan available, you’ll be able to find out which option is right for you.