The Basics of Consolidating
Seven in 10 students who graduated last year had student loan debt, and each of them started out in the “real world” with $29,400 in debt. Over the last fives years, student debt at graduation had increased an average of six percent each year. (Data from the Project on Student Debt)
With the number of graduates who have student loans going up, and the increasing amount of debt each of them has, student loan consolidation is a very important topic to discuss. Consolidating student loans has become almost the norm. Everyone seems to want to consolidate their loans, but many aren’t sure what it is or if it would even benefit them. They just think that with so many minimum payments floating around, it can’t hurt, right?!
What is consolidation?
Consolidation basically means that a lender takes your loans and pay them off. You then owe the new lender the same amount you owed before, but at a new interest rate and new repayment plan. The new interest rate is the weighted average of your previous loans interest rates, and the repayment plan could be extended to 30 years. Whew, now you have more time to pay these annoying loans off, what can be better than that?!
How does consolidation work?
When you consolidate your loans, you still owe the same amount. You may feel better because the loan payments each month decrease, but most people seem to get stuck in the illusion that they are saving money when that might not really be the case.
Whether you consolidate your loans or not, you still owe the same amount of money. You may have a smaller number of payments each month, and you may even have a smaller payment to make each month, but your principal balance will not change.
The truth is that consolidation could end up costing you thousands, even tens of thousands more dollars – it all depends on your situation. Taking your time and making the payments as you can seems great, but you will end up paying more interest in the long run. Eh,what’s a few more dollars in interest, right?
Here is an example of how costly this could be:
Let’s say you had $50,000 in student loans at a rate of 6.8%, 3.0%, and $4.8%. Typically when you graduate, they have you on the 10 year repayment period. This means all of your payments combined would be $575.40 each month. “But that means I can’t go out and have fun for 10 whole years!”
Your total payments throughout the life of the loan would be $69,048. But, you’re out of debt in ten years, no more Sallie Mae.
Now, lets say you consolidated at a low interest rate of 4.3%. “See I AM saving money!”
Not quite. Since you consolidated, your repayment plan is now a 30 year plan so your payments are only $224.52 each month. “Now I have spending money for the fun activities!” You might think so, but that means that this new plan is going to cost you a total of $89,075. That’s more than $20,000 you’ve wasted just to give yourself a little breathing room when paying these loans off. That’s a pretty great start on a down-payment, or a new car.
What else does this mean? That you’ll be at least 50 years old when your loans are paid off. Sallie Mae has a hold on you until you’re middle-aged. No thank you!
Should I consolidate my student loans?
Consolidation is not always a bad thing and can actually be very helpful for some. But before you jump into it with high hopes, there are some things you will want to consider before applying for consolidation:
1. You will end up paying a lot more for your college education unless you’re someone who would (intelligently) pay the $545 each month after you’ve consolidated.
2. Your lowest interest rate will increase when you consolidate your loans since the new one will be a weighted average of your previous interest rates.
3. Your loan repayment period will typically increase once consolidated, typically a 30 year plan.
4. I’ll say it a hundred times, while your payments go down in price, your total cost for a college degree will drastically increase.
There are a lot of other criteria to keep in mind but those are some of the ones a lot people I’ve talked to don’t realize. Keep your eyes peeled for more information about consolidation from Bright Cents.
Have you consolidated your student loans? Did you run into any trouble or was it a pleasant experience?