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Should I Consolidate My Student Loans?

Michael Lux Best Of, Blog, Consolidation, Student Loans 5 Comments

Student loan consolidation is a huge decision with major financial implications.  Anyone who says it is just a way to streamline your monthly bills doesn’t know what they are talking about.  When you decide whether or not to consolidate your loans, there are a number of factors to consider.  The purpose of this post is to make you aware of some of the many things to consider when you decide whether or not to combine your student loans.

What is student loan consolidation?

If you have multiple student loans, student loan consolidation is a way to combine some, or all, of your student loans into one loan.  For this to happen your new lender (the company consolidating your loans) will pay off your student loans in full on your behalf.  With your old loans paid off, you will then owe money to this new lender.

An Example

Suppose you have a total of 4 student loans:

  • $12,000 to Sallie Mae for a private loan
  • $10,000 to your local credit union for a private loan
  • $8,000 to Wells Fargo for a private loan
  • $15,000 to myfedloan for your federal government loans

In order to consolidate your private student loans, the company consolidating your loans cuts a check to your existing lenders.  To accomplish this, your consolidation company would contact Sallie Mae, your credit union, and Wells Fargo to arrange to pay off your loans in full.  They make a final payment and you then have a single private loan and your federal loans.  If you are wondering why the federal loans are not combined with the private loans, remember the golden rule of student loan consolidation.

Is consolidation right for me?

In order to make this decision you will need to compare the best possible consolidated loan against your current student loans.

The first and biggest factor is the interest rates on your loans.  If you are paying 4 or 5 percent on your student loans, consolidation may not save you much money.  If you are paying 6 or 8 percent it will depend upon what rates you qualify for.  If you are paying 9 or 10 percent or more on your student loans, consolidation could be very useful.  In addition to interest rates, you also need to consider whether your loans have fixed or variable interest rates.  A 3% rate might be nice for now, but locking in at 4% could be much better in the long term.

[Further Reading: The Sherpa Guide to Student Loan Consolidation]

Here is a checklist of factors to think about prior to consolidation:

  • Do I want to combine some or all of my loans?
  • What are the interest rates on my loans?
  • Are my interest rates fixed or variable?
  • Is my credit score high enough to get a low rate?
  • How does my debt-to-income ratio look?
  • Can I find a co-signer to lock in low rates?
  • What will my new monthly payments be?
  • How long will it take to pay off the loans?
  • How will consolidation affect my credit score?

If you have questions about what is in your best interests, feel free to ask the sherpa!

  • I consolidated my student loans – they were all Stafford loans. It didn’t end up saving me much (if anything – it definitely didn’t cost me anything… it was a long time ago but I remember making sure it wouldn’t cost me. Not sure if I went further to see if it could save me…). But I went to 2.5% fixed. It was nice to go to one payment.

  • Michelle @fitisthenewpoor

    We are considering this for my husband’s student loans. He has about 12 of them with a varied amount of interest. Only issue is that is biggest loan (a $12k one) has the lowest interest while the rest of his loans (1-3k) have the highest interest. I’m going to have to calculate if it’s worth it.

    • Remember, you don’t have to combine all of your loans. If one loan has a really low interest rate, it doesn’t have to be included in the consolidation.

  • sandy @ yesiamcheap

    When I consolidated my loans a few years ago I ran he numbers of difference scenarios using different combinations of loans. With something like 12 loans at varying interest rates it only made sense for me.

    I ended up consolidating all but three and paid the final three off first – those had the highest interest which would have dragged the rate up for an extended period of time on everything else. I am still paying off the other bulk but at a much, much lower rate than before consolidating and at a lower rate then I would have paid had I consolidated everything. Math can save you money!