Should I Consolidate my Student Loans?
One of the largest debt discussion points in the media currently is student debt. With student debt at an all-time high of $1.41 trillion in 2019, over 50% of recent college graduates are leaving college with student debt. Per Investopedia, the average amount of student loan debt per borrower is slightly above $35,000. A common dilemma for graduates with multiple student loans post-graduation is whether to consolidate their student loans into one loan.
Before we delve into the basics of consolidating student loans, there are a few key points to understand. First, there is no waiting period for when you can consolidate your loans. When and whether to consolidate your student loans depends on if you can find an interest rate lower than that which you are currently paying. It is wise to consider consolidating only after you have established a period of stable income and a strong credit score as these will factor into receiving a lower interest rate than what you are currently paying. Second, there are no upfront fees to consolidate your student loans. The only fees to be concerned with are early payoff penalties, late payment fees and loan fees for defaulting on your loans. Finally, if you elect to consolidate, you can expect to see a repayment term between 10-30 years depending on the value of your loans. Keep in mind, a longer repayment period will lower your monthly payment but can also increase your interest payments over the life of the consolidated loan.
Generally speaking, there are two types of student loan consolidation avenues to pursue: federal and private. Many people assume the two types are the same, but they are in fact very different.
Federal Student Loan Consolidation
- Consolidate only federal loans
- Eligible once you graduate, leave school or drop below half-time enrollment
- Utilizes the weighted average of your current loan interest rates to calculate the new interest rate
- For example, if you have a loan for $30,000 with an interest rate of 5% and a second loan for $20,000 with an interest rate of 7%, your new interest rate will be 5.80%
Private Student Loan Consolidation
- Frequently referred to as “student loan refinancing”
- Eligible to consolidate both federal and private loans into a single private loan
- Potential to lower your interest rate depending on your credit score, income and job history.
- Historically need a credit score in the upper 600s
- Income and job history should change for the better post-graduation versus while you were in school
Overall, the main reason individuals consolidate their student loans is to ease the management of their debt. If you have multiple student loans, whether it be federal or private, consolidating your student loans should simplify things and provide you with some peace of mind.
Before you consolidate, make sure you understand exactly how much you owe, how much you pay in interest and the time it will take to pay off your loans. Once you understand all these items, compare the consolidated plan to your current repayment plan and make the decision that is best for you.