Consolidate Student Loans
Making decisions about student loans, like most debts, is a complex issue. There are many factors to be aware of when considering if it is in your best interest to consolidate student loans. Here are some of the factors:
- What are the terms of your current student loans?
- Are your loans federal loans or private loans?
- Are you a still a full time student?
- Are you a part time student or in your grace period?
- Do you have any other debts?
- What are the terms of your other debts?
- What is your current income?
What else do I need to know? Interest on federal loans is tax deductible, while interest on private loans is not. The interest rate on a federal loan is usually lower than on a private loan. Because of the advantages that federal loans offer, It is not recommended that you consolidate federal loans with private loans.
By consolidating private loans you will have a single monthly payment, and that may be appealing to you. You also may be able to secure a lower interest rate, if your credit score has improved, or if today's interest rates are lower. Remember that interest rates are set by the lending institution, and sometimes, extra fees apply. It is a good idea to shop around for the best rates. In addition, as with any regular loan, you will be resetting the interest clock. Consolidating your loans may give you a smaller monthly payment, but it will increase the overall interest you pay when all is said and done. If you've already paid a substantial amount on your balance, this is a factor really worth evaluating. Just like refinancing a home mortgage, the interest is front loaded and the biggest slice of each payment you make for many years will be interest.
Although you can send extra money towards principal on your consolidated student loan, let's look at one possible scenario. Let's say you also have credit card debt and you are being charged a higher interest rate than on your consolidated loan. Where are you best served to send an extra payment? To your student loan, which is primarily interest at this point, or to your credit card, which has a higher interest rate?
What's the best way to make an evaluation? Because everyone's situation is different, there is not a one size fits all answer. Sometimes we make decisions about what we think our best financial path might be, and these decisions may actually be based in our emotions. For example, let's say you decide you want fewer, lower payments. What will you do with the money you save on the lowered payments? If you truly need the extra dollars just to make ends meet, that might be a wise decision. But if the extra dollars will just disappear in the general flow of consumerism, you may want to take a deeper look at your motivation.
There are new options today that enable you to make mathemathically based decisions as to which direction may actually be the best choice for your situation when facing an important quandry such as whether to consolidate student loans.