WHAT IS LOAN CONSOLIDATION? Think of consolidating your student loans as reorganizing all your key business contacts and putting
them into one Blackberry or on Rolodex. Bundling all your debt into one loan with one bill and one payment—maybe even with a lower interest rate. It's no wonder that loan consolidation is considered by many to be an organizational wonder for the 21st century. By consolidating, you're actually lowering your monthly loan payments past the average ten-year student loan limit. The downside is that you're shelling out more money in interest payments because you'll be making loan payments over a greater length of time. That's a big downside.
Should you consolidate your student loans? It depends on what your financial situation is and what your financial goals are. If your goal is immediate financial liquidity, that is, more money in your pocket for the short term, then consoliadting may be a good way to go. But if your goal is to get rid of your student loan debt ASAP and you can manage those regular monthly payments, then it's not such a great idea, unless you can consolidate your loans with a bargain-basement interest rate that's much lower than the one you have now.
OTHER OPTIONS It's easy to jump right in and consolidate your student loans without thinking the whole thing through. One loan, one payment, maybe a lower interest rate. What's not to like, right? There are, however, reasons not to consolidate your loans. That's especially true if you have other, better options available to you.
Most lenders will be happy to discuss different loan repayment options, such as 10-year loan up to a 30-year loan That frees up cash for you in the short term, on a monthly basis, to address other financial needs. The bad nes is that with consolidated loans, you wind up paying more in the long ter run for the provilege of refinancing your student loan. That's because of the "stretch factor"—when the lender moves your 10-year loan out to a 30-year loan. When that happens, the interest you pay on the loan can rise dramatically.
For example, let's say you have a $50,000 traditional 10-year Stafford loan. By consolidating your loan, you will likely get a break on the monthly payments, depending on the new interest rate, but you'll owe more money over the life of the loan.
By consolidating your loans, you are essentially taking your original loan and breaking them down into smaller pieces—pieces of which you'll be paying off in lower amounts but over a longer term than your original loans. That said, interest rates, which have been declining significantly in recent years, can potentially minimize any hike you see in your total student loan amount by consolidating.
INTEREST RATES In most instances, consolidated loans allow harried borrowers who have fallen behind paying back their student loans to reorganize their loans into one package. Interest rates on cosolidated student loans are fixed, meaning they cannot and won't change. The rate you get the day you consolidate your loans is the rate you have the day you pay off
your consolidated loan. To make things even sweeter, Congress made sure that the fixed interest rate on student loan consolidations could never exceed 8.25%.
But traditional student loan interest rates vary. They could be 5% or 6% or whatever, depending on whome you're dealing with. In the past few years, student loan interest rates have trended downward. By 2003, student loan interest rates were hovering at about 3.5%. That's a big savings over a loan based on 8.5% rate. For example, a loan recipient who borrows $20,00 for 10 years at $3.42% will pay roughly $5.4 in interest. But a student borrower operating under a loan with an 8.25% interest rate, under the same time line and dollar amount, would pay about $9,200 in interest rates. Of course, if you lock in what you consider a good rate, and interest rates go down even further, you're pretty much stuck with the interest rate you signed up for. but with interest rates at historic lows so far in the 2000s, there is a bit less to worry about on that front.