What Grads Should Know about Consolidating Student Debt
Whether you have recently graduated or it has been a few years, you may be wondering whether or not you should consolidate your student loans. If you have received your student loan balance statement and felt completely overwhelmed by it, you are not alone in the conquest. In fact, the average student loan debt is right around $35,000 per student upon graduation.
"Consolidating your student loans may be one way to help ease the financial burden you feel from your debt."
Depending on how much debt you have, your student loan payment per month could be more than rent itself. That is a reality for many borrowers. While student loan debt may seem like your new reality, it does not have to be.
Consolidating your student loans may be one way to help ease the financial burden you feel from your debt. Of course, this may or may not be the right strategy for you, so you must consider all that goes along with it before you apply (Check out THIS blog post on 7 way to conquer your student loan debt as a guide).
Below, I'm going to talk about consolidation/refinancing to help you better understand what to expect when you choose to help yourself to a better financial future.
Benefits of Consolidating Student Loan Debt
When it comes to consolidation of your student loan debt, you may be wondering what it can actually do for you. Below, are some of the potential benefits.
1. You can go from a variable interest rate to a fixed interest rate
If you currently have a variable interest rate, you may be worried about what this means for you in the future. It is important to understand that a variable rate can fluctuate based on trends. Therefore, if your interest rate is 3.2 percent today, next year, it may be 4.5 percent.
When you consolidate, you will have the option to turn the variable rate into a fixed rate, which remains the same despite any changes that occur. Therefore, if your interest rate is set at 5.5 percent, it will remain at 5.5 percent. (To explore interest rate types a bit more, check out this resource from Investopedia.com).
2. You can get a lower interest rate
If you currently have a high interest rate on your student loans, you will find out that it is not beneficial to you and you will spend thousands extra over the course of your loan term. If you consolidate or refinance your student loan, you will receive a better interest rate at the going market rate, which will help you save in the long term. According to Lendedu, the average borrowers saves about $20,000 through refinancing.
In addition, a lower interest rate will allow you to pay your loans down even faster than you would have if you had a higher interest rate.
3. You can combine multiple loans
If you have more than one student loan, it does not make much sense to keep making a bunch of different payments every month at different rates across the board. When you consolidate, you will be able to combine all of your loans into one and only make one payment per month at one set interest rate.
Not only will this help lower the amount you shell out each month, you will only have one payment to worry about, which is much more convenient.
Important things to consider before consolidating your student loans
Just as there are some advantages, there are disadvantages as well and you need to take some time to look over your options to make sure the decision is in your best interest.
1. It can cost you upfront
What this means is that you may have to pay an origination fee to setup the new loan. Often times, the fee is a percentage of your loan amount and is paid directly to the lender.
2. If you are close to loan payoff, consolidation might seem tempting but is not a good idea
If you are close to paying off your student loans, you do not want to consolidate them, as this may not work out for you. It is often not worth the hassle if you only have a few months left and you should just ride it out – you’re almost there anyways.
3. You may end up paying more
While you wouldn’t think it possible, you can actually end up paying more when you consolidate your student loans. This only happens when you extend the term of your loan. For example, if you have 5 years left when you consolidate and you stretch it over a new 15-year term, you will end up paying more over time than if you had kept the original 5-year option.
Final Thoughts on What Grads Need to Know about Consolidation
It is important that you make sure this is the right choice for you before you do it. There is an application process and you will need to make sure you are eligible to consolidate your loans. If you are not, then you will not be able to do it. Do understand that you may need to have a co-signer and this is not something that is always available to everyone.
If you have decided that consolidation is right for you, then you should speak with your local private lender to see what they can do for you.
What are you doing to pay off your student loan debt as quickly as possible? Is consolidation part of your game plan? (Assuming you've your due diligence as to if it's a good approach for you). Share in the comments!