Student Loan Consolidation: Is It Right for You?

by Tiffany Young

With all the stress and worries of tests and papers, there’s no time to worry about financing college. Get your finances straightened out this summer, before classes start back, so that you can spend all your time like you should: buried in books.


What is Student Loan Consolidation?

Loan consolidating can be very confusing. Postcards that come in the mail saying “Consolidate Now!” can make it seem like a brainless endeavor, but what loan consolidation actually means to your finances in the long run is a puzzle to many people.

Loan consolidation is when several different loans are paid off by one vendor, who opens a new loan. This new loan allows you to pay just one bill instead of several different loans, possibly, from several different lenders. There are benefits to consolidating debt, but there can be drawbacks, too. Depending on your own situation, you will need to discover whether consolidating loans or keeping loans separate is the best way to go. But don’t wait until sometime down the road to consolidate. If you decide that consolidation is the best option for you, do it now. Consolidation rates are at record lows through June 30, 2005. On July 1, 2005, interest rates for students in college or still in their six month grace period will rise from 2.77 percent to 4.66 percent. Rates will rise from 3.37 percent to 5.26 percent for student borrowers already making payments.

Rates for Loans in Repayment (Source: Sallie Mae)
2000-2001	8.19%
2001-2002	5.99%
2002-2003	4.06%
2003-2004	3.42%
2004-2005	3.38%
2005-2006	5.07%

Benefits of Consolidation

One benefit of loan consolidation is the simplicity of paying one monthly bill and knowing that all your debt is through one financial lender. There is no need to have seven different addresses and banks, to which you must keep up with and send out bills on a monthly basis. The monthly payment is usually much lower on consolidated loans than individual loans. If you decide to consolidate, they will take all your loans together and then give you a few options on how fast you want to pay them back.

If you are still struggling with getting a job, then there are options that take this into account. For example, you can pick an option that has a smaller monthly fee for the first couple of years while you get started on your career. Then the monthly fee increases on the assumption that you will have your finances in order and be making more money than you had been when you had just graduated. While this is great for students who are young and have very little income coming in, many students going back to college may have a spouse to help them repay their loans.

If you can afford paying a higher monthly payment for your student loans each month, you should. That way you can pay off your balance sooner and avoid paying more interest than you have to. Consolidated loans also allow you to pay more than your monthly balance without incurring fees. So if you have extra money one month, say your income tax refund, you can apply it to your student loans and pay the debt off quicker. And the best thing about loan consolidation is that you can generally get a lower fixed rate for your consolidated loans than on individual loans. A fixed rate means that they won’t increase your rate later on as inflation rises. This generally works in your favor, since rates tend to increase as time goes on. Come July 1st, rates are will rise so, locking in a low interest rate now would do you good in the future.

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