Should You Consolidate Your Student Loans?

Practical advice to brighten up your financial future.

The good news: Biden has once again pushed back the federal moratorium on student loan interest. Thanks Biden! Bad news: It’s only for six months (😭😭😭) and you’ll need a plan for how to get out of it. But fear not, interest rates remain historically low, even if they are on the rise. So if you took out your student loans years ago at high interest rates, right? Go check it out! –the smart choice is to consolidate your student loans to take advantage of a lower rate and payment before the required payments restart.

Student loan consolidation involves paying off each of your existing loans with a new loan. There are federal options and private options available to you. The goal of consolidation is usually to reduce your monthly payment, but you can also consolidate to reduce the amount of interest you will pay over the life of the loan. It all depends on what you are working towards.

If your monthly expenses have, say, put in a few pandemic pounds, then a lower payment is obviously a good thing. But there are different ways to reduce that number, and if you’re not careful, the “fix” could end up costing you more in the long run.

Let’s say you’re in good financial shape and can afford your current payment, but your loans have a higher interest rate. Today’s lower rates applied to the same term and principal means a lower payment for you. Nooice.

Now ask yourself if you need your current payment to drop even more, and you are ready to extend the term to do so. Maybe you were only qualified for a 10 year term, but now you have the option to consolidate a 20 year term. Even with a higher interest rate, your recurring payment could go down. The catch: you have to decide if it’s worth paying all the extra money that comes with debt from another decade.

Let’s do some quick math. A loan of $ 50,000 with a rate of 5% and a term of 10 years has a monthly payment of $ 530.33. Extend that term to 20 years and the monthly payment is only $ 329.98. (Sweet!) The catch is the total interest paid over the life of the loan. With the first loan, you pay $ 13,639 in total interest; with the second, you pay $ 29,195. (Ouch.)

There’s another problem with consolidation: Federal student loans come with special benefits, including an array of repayment and forgiveness options (and, ahem, the ability for a U.S. president to establish a moratorium without interest on repayment in times of crisis!), which may not go to your new loan. If you have all of the federal loans and consolidate them with the Direct Consolidation Loan program, you will keep them. If you look elsewhere, you won’t.

Choose the path that suits your financial goals. Remember, there is nothing more expensive than a missed opportunity.—MP

About Judith J. George

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