Should You Consolidate Your Student Loans?


If you just graduated from college, then chances are you have some debt in the form of student loans.You may be wondering if there is any way to reduce the amount you have to pay. One option for reducing your debt is to consolidate your student loans.

Student loan consolidation is comparable to refinancing a house on better terms: even though the principal of the loan won’t be affected, the interest rates when you consolidate student loans to a fixed rate can be substantially better, reducing your monthly payments by up to 40%. Also, you might be able to stretch out your payment time to reduce your monthly payment amount.

The disadvantage whenever you consolidate student loans during your initial six-month grace period is that you must start making your payments right away. This is often difficult if you have not found a job after graduation. An option is to wait until right before the grace period ends to consolidate and still lock in the lower rates. In addition, once you have consolidated your student loans, you cannot un-consolidate them again, so make sure to consider your choice carefully.

When you consolidate student loans, your new lendor pays off your government loan and issues you a new loan. The standard way to determine the interest rate on the new loan would be to take the average interest rates on all of the student loans, and offer a new rate that is an eighth of a percentage point higher (up to a maximum interest rate of 8.25%).

At first, getting a higher interest rate might not sound like a great reason to consolidate student loans,but this rate is fixed over the life of the loan, whereas the government rates will fluctuate. Since rates are at an all time low right now, locking in the current rates might be a good idea. Furthermore, a lot of banks give you ways to bring down the percentage rates. For example, some lendors will drop the rate by as much as a quarter point if you agree to automatic withdrawl from a checking or savings account, whereas others drop the rates after a certain number of timely payments. And there is no penalty for paying off your consolidated loan early.