If you just finished college, you probably have a lot of debt from student loans. You might be wondering if there is any way to lower the amount you have to pay. One way to reduce your debt is to combine all of your student loans into one. Student loan consolidation is like refinancing a house to get better terms. The principal of the loan won't change, but you can lock in much better interest rates when you consolidate student loans to a fixed rate, which can cut your monthly payments by up to 40%. Also, you might be able to make your payments over a longer period of time to lower your monthly payments even more.
When you consolidate your student loans during the first six months of your grace period, you have to start making payments right away. This can be hard if you haven't found a job after graduation, but you can wait until just before the grace period ends to consolidate and still get the lower rates. Also, once you've consolidated your student loans, you can't take them out again, so think carefully about what you want to do.
How do I figure out the interest when I combine my student loans?
When you consolidate your student loans, your lender pays off your government loan and gives you a new loan under its own name. The average interest rate on all student loans is used to figure out the interest rate on the new loan, which is usually an eighth of a percentage point higher (up to a maximum interest rate of 8.25 percent ). Even though agreeing to a higher interest rate might not seem like a good reason to consolidate student loans, this rate is fixed for the life of the loan, while the government rates change. Rates are at an all-time low right now, so it might be a good idea to lock in the rates at this time. Also, a lot of banks offer ways to lower the percentage rates. For example, some lenders will lower your rate by up to a quarter point if you agree to have payments taken out of your checking or savings account automatically. Other lenders will lower your rate after a certain number of on-time payments. As an added bonus, you won't be charged extra if you pay off your consolidated loan early.
Why wouldn't you want to combine your student loans?
Before you decide to consolidate your student loans, you should think about what other options you have. For instance, did you know that you might be able to get rid of your student loan completely? Volunteering, like for the Peace Corps, or working for the government in a low-income area as a teacher or doctor are two ways to get your student loans paid off. But you can't cancel your student loans once you've consolidated them. If this kind of work is available and interests you, it could be a better choice than consolidating your loans.
When you are almost done paying off your loans is another time to think twice before consolidating them. It might be better for you to just pay more each month and save yourself some interest and the trouble of consolidating.
Lastly, you might want to keep some loans open because they have special benefits. For example, if you want to go back to school and have a Perkins loan, you wouldn't want to combine it with your other student loans. The government will pay all of the interest on Perkins loans while you are in school, but you won't be able to get this benefit if you have chosen to consolidate your student loans. You could always choose not to include certain types of loans in the consolidation.
