Do I have to go “All In” on student loan consolidation?

Michael Lux Blog, Consolidation, Student Loans 2 Comments

Consolidating your student loans is a major financial commitment.  One thing that people often don’t realize is that consolidation is not an all or nothing proposition.  In fact, only consolidating certain loans can often be very advantageous.  The best way to illustrate this is a simple example:

One Possible Private Loan Situation

Suppose you have three student loans.  Each loan has a balance of $10,000.  Loan A has an interest rate of 9%, Loan B has an interest rate of 7%, and Loan C has an interest rate of 3%.

After reviewing a list of student loan consolidation companies, you learn that the best interest rate you can get is 5%.

The Question: Should I consolidate?

Many people make the mistake of thinking that combining all three loans is the best approach because you are still lowering your interest overall, so it is a smart move.  Combining all three loans leaves the borrower with a $30,000 debt at 5%.

In reality, the smartest move would be to only consolidate the high interest loans and to leave the low interest loans alone.  In our example, the borrower could have one $20,000 loan at 5% and one $10,000 loan at 3%.  Doing this approach will help save a lot of interest over the years (the exact amount will vary depending upon how long it takes to pay off the loans).

A Note about federal loans

This is one area where federal loans work much different than private loans.  If you combine your federal loans, it is done through the Department of Education.  Interest rates are not determined based upon what you qualify for, instead, it is just a weighted average of all of your loans.  This calculation policy means that a reduction of interest rate is not an option through federal government consolidation.

  • mundaneart

    You can combine private and federal student loans with SoFi. I left my low interest undergrad student loan untouched. I consolidated federal and private law school loans. My private loan was in the high 8’s and variable. My federal loans were in the 6’s. My SoFi loan is in the low 5’s. I was also able to get rid of my cosignor. I will pay my loan off faster and save at least $17k over the life of my loan. I was very happy with the process. I’ve been using SoFi for at least 6 months now without issue. I’d recommend them regardless of their referral program but I’m including their link so we can each get $100 if you use it. Copy and paste into your browser and take out the spaces and replace DOT with a period. http://friends DOT sofi DOT com/6MbbZ

  • mundaneart

    I want to add that I know some people consider consolidating private with federal risky but in my situation, it isn’t. I’m 5 years into paying the 10 year federal loans. I’m married and with my husband’s income I do not think I would qualify for IBR. Also, SoFi has their own forbearance options in an emergency. I will not be working in the public sector so forgiveness in 10 years is not an option for me. There are also some protections with private loans. Federal loans get super priority where they can garnish social security checks and tax returns and you are barred from working in federal employment if you have federal loans in default. Private loans don’t have quite as broad collection ability. In many states, social security cannot be garnished by private companies.