Should I Consolidate?

Dear Lauren,

Consolidating your student loans means that your separate individual loans are paid off by the consolidating lender and 1 new loan is created. There are 2 types of student loans?federal and private. If your student loans are federal loans such as Federal Stafford Loans, Federal Direct Stafford Loans, and Perkins Loans, they are backed by the government and can be consolidated together. However, if any one of your loans is private, it is not backed by the government and cannot be consolidated with federal loans.

The terms for a new Consolidation Loan generally range between 12 and 30 years, rather than the standard 10-year term you likely have now. A Federal Consolidation Loan can lower your monthly payment by stretching out your repayment term. However, the longer repayment term of a Consolidation Loan also means you’ll pay more in interest over the life of the loan. You are charged interest on the outstanding balance?so the longer you take to pay, the more you pay.

You can counteract the longer repayment term by pre-paying or accelerating payment (there is no pre-payment penalty on federal student loans). Federal Stafford Loans made prior to July 1, 2006 have variable interest rates that fluctuate every year, while loans made after that date have a fixed rate of 6.8%. By consolidating, you ensure that for however long it takes to pay the loan off, the interest rate will never change. Currently, Federal Stafford Loans have a variable interest rate of 6.9%, which will cost you more if rates decrease and less if they increase.

Also, consolidating your loans reduces your monthly payments to just 1. So, if you have multiple loan payments and excessive loan debt, or your student loan payments are more than your monthly budget can allow, your dad may be right and you might want to consider consolidation. While paying more interest over the life of the loan is not ideal, it’s preferable to falling behind on your student loans, which can give you bad credit and prevent you from buying a car or house. To find out more about consolidation, start by talking to the existing lenders of your loans. Be sure to shop around for the best benefits, like a lower interest rate for on-time payments.

Best,
Betsy