If you’ve recently graduated from college, you’ve probably been
bombarded with mailings and advertisements urging you to refinance
(or consolidate) your student loans right away. But wait, what is
loan consolidation? And why should you do it?
If you’ve just graduated from college, you’ve probably got a number
of different student loans, all in different amounts from different
lenders at different interest rates. Loan consolidators (which can
be private banks, lenders or government agencies) pay off all your
individual loans in exchange for a single loan in the same amount
issued to you. So now instead of all those different loans, you’ve
got one loan that you repay to the consolidator.
Refinancing your student loans reduces your monthly payments and
locks in a fixed interest rate. In most cases, student loans have
variable interest rates set a few points below prime. As interest
rates go up, so will the interest rate on your loans. When you
refinance your loans, you lock in an interest rate based on the
current market conditions that will be set for the life of your
loan. Therefore, it’s important to evaluate the market before making
the decision to consolidate. Right now, interest rates are low, but
they’re going up and most economists predict that they’ll continue
to go up for awhile. So for many people, this is a good time to
Your credit history will also determine your eligibility for loan
consolidation programs. Loan consolidators can be picky in who they
accept for their programs, so the option to refinance is usually
only available to individuals who have established good credit by
paying their loans back on time. If you’ve missed payments or made
payments consistently late, you may not be offered the best terms,
if you’re accepted at all. If your application is denied the first
time, call the consolidator and talk to a loan officer about the
reason for your rejection. The officer may offer you advice on how
to qualify for their program at a later date.
If you decide to refinance, be sure to consolidate federal loans and
private loans separately from each other. When you consolidate your
loans, you’re typically offered a rate that’s 1-2% lower than the
average rate of your loans. Federal student loans often carry much
lower interest rates than private loans, so consolidating them
together can bring up the average interest rate of your loans and
leave you with a higher fixed rate locked in. If you only have one
private loan, it may not make a difference, but it’s important to
assess your options before committing to refinance.
Is there anyone who shouldn’t consolidate? Let’s look at a scenario.
Tracy has 2 loans for $5,000 each that are scheduled to be paid off
within 5 years. She can afford to make her monthly payments but
wants to see if she can save a little extra cash each month by
consolidating. She finds out that she can refinance the loans into a
0,000 consolidation loan to lower her monthly payments and she’ll
be eligible to extend her payments over 8 years. But because she’s
extended the life of her loans, she’ll be paying interest over a
longer period of time and may wind up paying more overall than if
she had kept her loans as they were.
It is tempting to pay less per month but if you can afford to pay
off your loans in a shorter period of time, then you’ll likely save
money on interest in the long run. Obviously every situation is
different and you won’t find all your answers in a short article
like this. But if you think loan consolidation might be right for
you, check out the Student Loan Network’s site at
Studentloanconsolidator.com for more information or speak with a
loan officer or financial planner to see what your options are.
This article was published by Sarah Russell on Smart Young Money – a
collection of money management resources for teens and young adults.
For great information on using credit, managing debt and more for
young people, visit
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