One of the more misleading aspects about student loan consolidation is the way most companies advertise potential savings. Some also call this number average savings.
If you look closely, more times than not there will be a little * next to the huge savings number. The fine print down at the bottom of the page will explain how the lender reached this number. How they reach this number doesn’t really matter, nor does the actual number. It is just a big number used to catch your attention. The number that really matters is how much you could actually save. For many, it is tens of thousands of dollars, for others, it is no real savings at all.
Savings also depends upon how you look at it. Some people view theirs “savings” based upon how much less they spend each month. The problem with this approach is that it ignores how much you are spending over the life of the loan. Paying $100 per month for 5 years is a much better than paying $80 per month for 10 years. For most, savings is defined by how much they spend over the life of the loan.
If you want to figure out how much you actually save, consider the following:
Interest Rate – This is the most important factor. The interest you pay is the cost of borrowing money. Put another way, the interest is how your lender makes money. If you lower your interest rate, your lender makes less money and more money stays in your pocket.
Length of Repayment – This is where our analysis gets a little tricky. The repayment length that you select makes a big difference in your monthly payment, but it doesn’t necessarily affect how much you save or don’t save on the loan. This is because most borrowers want to get their loan paid off as soon as possible (this is especially true for higher interest loans). If you are aggressively paying off your loan, a 15 year repayment might only take 11 years. The faster you pay off the loan, the less you spend on interest, the more you save.
The Balance – The size of your balance will determine how much the interest rate hurts you. The larger your balance, the more interest you are paying each month. If you have a significant pile of student debt, even a slightly smaller interest rate could mean huge savings by the time it is paid off.
Running the Numbers
Now that we have a basic understanding of the factors that matter when it comes to calculating savings, we get to the math. Fortunately, the computer can do all the math for us. To figure out how much you could save by consolidating, first find your total loan balance and interest rate. These numbers do not have to be exact, but the more accurate your estimate, the more accurate the results will be. If you want to know what your new interest rates might be, our consolidation reviews table shows the different rates for various consolidation companies.
Next, try using any loan payoff calculator. This one is pretty simple, and the results it spits out have nice details. For each lender you check, you will need to run a separate calculation. First calculate how much your current loan will cost you. The number in the results to pay close attention to is the total interest. Now run the calculator for what you think your new loan might be. The total interest number should now hopefully be lower indicating the money that you can actually save on your loan by consolidation.
Advertisements about potential savings might grab your attention, but they have no practical value. This number could be much lower or much higher than your actual savings. Fortunately, after some quick math, you can figure out exactly where you stand.