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Should I consolidate my student loans? That’s a question many struggling college graduates are asking these days. If that’s you, you’re not alone. Certified degree holders (just like you) are walking across the stage with the world at their fingertips, an average of $35,359 in student loan debt, and monthly payments that eat up an entire paycheck.1
With so many payments and so little money left over at the end of the month, it’s no surprise you might be looking for relief through student loan consolidation. We can’t say we blame you.
But is consolidation really the best way to take care of your student loans? Let’s find out . . .
What Is Student Loan Consolidation?
Student loan consolidation is the process of taking your (many) loan payments with varying interest rates and terms and rolling them into one lump payment—hopefully (but not always) with a lower interest rate and term.
At this point, you’re probably thinking this sounds pretty good, right? Well . . . it depends.
If you haven’t heard, student loan debt is at an all-time high with over 44 million student loan borrowers in the country.2 And this year alone, both public and private universities will admit 19.9 million students into their programs—and you better believe not all of those people will recieve full-ride scholarships.3
Going to college debt-free is possible! Find out how.
So now that these graduates are out in the workforce, they’re quickly approaching the day they have to start paying off a degree they may or may not even be using. No wonder people are starting to turn to student loan consolidation for relief.
Here’s the deal: Student loan consolidation is the only form of consolidation Dave Ramsey recommends—but on a case-by-case basis.
If you’re wondering if you should consolidate your student loans, there are three things you need to know (and commit to memory) before you make your next move. And remember, you need all three of these conditions to be in place before even considering student loan consolidation.
1. You can only consolidate your student loans once . . . so make it count.
No matter what you think should happen and no matter what your old college roommate says, you can only consolidate your loans once. So if you’re going to consolidate, make it count, and make sure you’ve really done your research.
2. Always choose a fixed rate over a variable rate.
Some companies will try to push you into a variable rate to get more money out of you. This is bad—very bad. Remember when we told you that you can only consolidate once? If you get suckered into a variable rate, there’s no getting out of it. Variable interest rates change based on market rates . . . and you know how much the market can change. Just do yourself a favor and steer clear!
Not only that, but some of these same companies will also try to get you to consolidate your loans through them and charge you a percentage of your overall loan just for “helping” you out . . . but they never really intend on paying your loans! If you’re having conversations with a company like this—run away, and fast.
3. Make sure your new net interest rate would be lower than your current net interest rate. Then, refer back to number one.
If you’re thinking about consolidating because you just can’t keep up with the compiling interest payments, the worst thing you could do is consolidate all of your loans at a higher rate—and then get stuck with it.
“So go consolidate it if you want, but I don’t want any emotional relief from the important thing that is you. You being game on. You being pissed off is the secret sauce. That gets you out (of debt).”
— Dave Ramsey
What Types of Student Loans Can Be Consolidated?
Now, before you skip off to your local bank (or start searching for loan consolidation companies), you need to know what kind of loans you have and if they’re eligible for consolidation. Spoiler alert: Only your federal loans can be consolidated for free through the government.
Federal Student Loans
If you’ve got a handful of federal student loans, you might be eligible for student loan consolidation for free through a U.S. Department of Education service. This Direct Consolidation Loan allows you to roll all of your federal loans into one payment under a new fixed interest rate (based on a weighted average of your current interest rates and rounded up to the nearest one-eighth of one percent).4
But take note: There’s no cap on the interest rate on a direct consolidation loan, and securing a lower monthly payment could also mean you’ll be paying on your loan for longer—even up to a term of 30 years.
Private Student Loans
If you’ve got private loans, sometimes it feels like the only way to find relief is through consolidation, but it’s not always an easy process. Some lenders or banks will allow you to consolidate your private loans into one lump sum under one interest rate—but your rate is often determined by your credit score. Yikes. Not only that, but their interest rates are also usually higher than a direct consolidation of your federal loans. Ouch.
Private and Federal Student Loans
If you’re like most graduating students, you probably have a mix of both private loans and federal loans. And if that’s the case, you’ve probably found out how hard it is to consolidate these types of loans together into one happily blended family. If you’re looking to roll these two kinds of loans into one, you’ll have to go through a private lender under a process called “refinancing.”
Student Loan Consolidation vs. Refinancing: What’s the Difference?
Tomato, to-mah-toe right? Wrong. Student loan consolidation and student loan refinancing are two completely different things. Consolidation takes the weighted average of your interest rates on your loans and rolls them into one.
With refinancing, you’re taking your private loans (or a mixture of your federal and private loans) and essentially starting back at square one. You have to find a private lender or company willing to do this for you, and usually, it means your stash of cash will take a beating.
Once you find a lender, they will pay off your current loans and become your new lender. And you can say goodbye to your old payments and old rates—because once you’ve signed up with a new lender, you’ll have a different rate and new repayment terms.
But remember: Don’t be so desperate for a lower monthly payment that you sign up for a longer repayment period. You’ll end up paying even more in the long run. And who wants to do that?
Should I Consolidate My Student Loans?
If you’re drowning in monthly student loan payments and considering student loan consolidation, listen closely:
“Student loan consolidation doesn’t mean elimination.”
– Dave Ramsey
As we’ve said before, when you lower your monthly payments through consolidation, you’re also lengthening the amount of time it’ll take you to pay the loan back (if you’re making minimum payments). And as you know, the more payments you make over time, the more money you’re paying in the long run. So if you’re going to consolidate, don’t take your foot off the gas. If you really want to pay less interest, get gazelle intense and pay off your student loans as fast as you can.
Here’s the bottom line: If you can secure a lower interest rate by consolidating, do it (as long as it’s fixed). Your monthly budget might feel some relief for a time, but don’t even think about taking a sigh of relief. It’s time to get on a budget and get this debt out of your life for good! Find a local Financial Peace University class in your area and learn how to save for emergencies, pay off debt, and kick your student loans to the curb once and for all.
“Student loans are the only thing I recommend consolidating. That’s because it isn’t an ongoing debt unless you’re addicted to going to class.”
— Dave Ramsey
If you’re a parent, neighbor, friend or even a well-meaning stranger to someone who wants to go to college, know that it’s possible to get a debt-free degree. Check out Anthony ONeal’s new book, Debt-Free Degree, and learn how.