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How Consolidating Student Loans Will Work or Not Work for You

Updated on May 12, 2011

In order to get through colleges and universities, you, like many students, borrowed money to pay for tuitions, expenses, rent, etc.  Most students do not realize that the loans come from various sources such as the US federal government, banks, and other lending institutions.  When it is time to pay the loans, each entity who lend the money must be paid separately.  Hence, every month, you'll receive several bills and have to write several checks to pay your student loans.


In comes the college student loan consolidation program.  Usually, you're presented with it when you're looking to find a way to reduce your monthly payment.  Consolidating student loans eliminate multiple bills and checks.  The consolidation gives you one bill so that you only write one check.  It can also lower your monthly payment if done right.

But first, you must understand that in consolidating student loans, you're in fact taking out another loan.  It's a student loan consolidation loan.  And just like any other loans, there are factors to consider, such as interest rates.


Sometimes, rushing to consolidate student loans is a bad idea.  One factor that you should be aware of is interest rates.  If the new student loan consolidation rates out there are higher than your average student loan rates, you're gonna pay more.

Self Help Books on Consolidating Student Loans


  • Could lower monthly payment by a good amount
  • Lock in one fixed rate that is lower than the average of your current multiple rates
  • More convenient single payment

The above thee reasons work hand-in-hand. For example purpose, let's say that you have three 10-year loans of $10,000 each with the respective annual interest rates: 6%, 6.25%, and 7.75%. With the help of, your monthly will be $111.02, $112.28, and $120.01. Your monthly total will then be $343.31.

If a certain student loan consolidation loan rate is available, say 6.4% and you consolidate all your loans under one big loan, your monthly becomes $339.12. The new single payment is lower than your total even if the new rate is higher than two of your loans. The sample calculation did not factor in the FEES OR COST of consolidation and that could add to your bottom line.

  • Better student loan incentives

Cash rebates and waiver of final payments are typical incentives that a lending institution may give as promotional to their college student loan consolidation program. There are more types available, depending on the lending institution. You'll have to balance new borrower incentives with your current incentives, if you have any.

  • May help prevent student loan default

A student loan can default if you fall behind in payments. Before this happens and if you qualify, you should consider getting a student loan consolidation loan. When consolidating student loans, your existing loans (the one about to default) will be paid off. And you will then begin payment obligations on a new loan that may have higher rates and/or longer payment terms. What you will be avoiding is a bad credit mark from a defaulted loan.


  • The student loan consolidation loan rate may not be lower than the average of your multiple rates

Note this: federal student loan rates are different from private student loan rates. The rate for the federal loan comes from the US government. The rate for the private loans are driven by market forces and is set by each lending institution separately. In your decision, you need to keep straight the proper student loan consolidation rate.

  • Longer repayments mean greater total cost of loan

Sometimes, lower monthly does not always means less costly. For example, paying off a $10,000 loan can be more costly even if you're paying less monthly. Again, with the help of -- $10,000 at 6.5% interest for 10 years has a monthly payment of $113.55 for a repayment total of $13,625.66.

But the same $10,000 at 8% interest for 20 years has a monthly payment of only $83.64 for a repayment total of $20,075.98.

The numbers can be manipulated many ways. Much less monthly payment, but longer term and higher student loan consolidation rates may be more expensive for the life of the loan. Also, the hefty 1.5% extra and maybe the additional 10 years, carries with it a nice commission to the closing agent. Make sure he/she gives you a gift certificate.

  • Some forbearance and forgiveness provisions may not be available

Some student loans have two of the best features that can come in handy during financial crunches. These provisions may not be available in a consolidated loan:

Forbearance. When paying back student loans, you're payment consists of the principal + the interest. During forbearance, your payment of the principal is temporarily postponed, but the interest continues to accrue. You must continue to pay the interest. Hence, you're paying less monthly, but not paying down the loan. Also, forbearance is given at the discretion of the lender.

Forgiveness. Some institutions have loan forgiveness programs if you qualify. This means that you don't have to pay the loan in full or in part when approved.

  • May lose current borrower benefits on your existing loans

Consolidating student loans means getting a new loan. The old loans are paid off, but a new one is assumed. With the new student loan consolidation loan, comes new provisions. And these provisions may or may not contain the benefits that were included in the old loans.


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