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Student loan consolidation basics

January 22, 2007

If you’re repaying student loans, you may feel overwhelmed by how much you owe, particularly if you have several student loans to pay off. If you have two or more loans to pay off, you might want to look into student loan consolidation. Consolidation may allow you to lock in an interest rate and extend the time you have to repay your debt, which can lower your monthly payments.

Lowering your payments
Student loan consolidation means replacing your outstanding loans with one consolidated loan. Often when you consolidate loans, you can opt for a longer time period to repay your debt, which can lower your monthly payments.

For example, let’s say you have two 10-year loans:

Loan 1 Loan 2
Amount: 10,000 15,000
Interest rate 4% 4.5%
Term 10 years 10 years
Monthly payment $101.25 $155.46

Your total monthly payments for the two loans are $256.71. If you consolidate the two loans at 4.5% and extend the term to 15 years, your monthly payment will fall, saving you $65 a month:

Consolidated loan amount: $25,000
Interest rate 4.5%
Term 15 years
Monthly payment $191.25

Locking in your interest rate
Many student loans have a variable interest rate, which means the rate changes each year. By consolidating your loans, you can lock in an interest rate, so you know your payments are the same throughout the life of the loan. In a low-rate environment this can be wise, especially if you will be paying off the loan for 10 years or more. However, if rates are historically high and you expect them to fall (for example in the 1980s), you may be better off waiting to consolidate so you’re not stuck with a higher rate than necessary.

One payment a month
Student loan consolidation allows you to pay multiple loans as one, so you don’t have to juggle different payment dates and amounts. You can even have the money drafted from your account, which in some cases can lower your interest rate .25 percent.

Caveats
Remember that if you consolidate and extend the term of your loan, while your monthly payments are likely to be lower, you’ll be paying more over the life of the loan, because you’re paying longer. Consider what you can afford, and choose the shortest loan term that you can handle to keep your costs as low as possible.

If you don’t have much more time left to pay on your student loans, consolidation may not be the best choice for you, since the benefits are mostly long-term. Carefully examine your monthly budget and determine the plan that is right for you.

Just like your student loans themselves, you can choose either federal or private loan consolidation plans. Shop around for student loan consolidation programs so that you can save money and better manage your budget.

 

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