Should You Consolidate Your Student Loans?

by Miranda Marquit · 10 comments

Student loans

Unless Congress acts, and the President signs off on it, interest rates on federally subsidized student loans are set to rise to 6.8% on July 1, 2013. That’s double the current rate of 3.4%.

For graduates repaying their loans, that could mean a significant increase in monthly payments. If your budget is already stretched, and you don’t have room to pay more on student loans, that could be a real problem.

So, what can you do? One option is to consolidate your federal student loans before the rate increase hits. That way, you’ll lock in a lower rate, as well as avoid future interest rate hikes.

How Student Loan Consolidation Works

When you receive your student loans, they’re usually disbursed individually for different years. This means that you might end up with several different student loans by the end of your college career. You might also have different interest rates, depending on what the rate was when you received each of your loans. As a result, you make multiple payments on your loans, which usually have terms of 10 years.

Student loan consolidation provides you with a way to put all of your federal loans into one place. You only make one payment, and you have only one interest rate. Additionally, the term is often lengthened, giving you 25 years total to repay your student loan debt.

If you want to take advantage of student loan consolidation from the federal government, you need to make sure that the loans in question qualify. You can fill out information online that’ll help you determine which loans are eligible for consolidation.

Once the loans are identified and approved, you receive a bigger loan that pays off the smaller loans. Your payment amount is set — so you won’t have to worry about whether or not Congress will come to the rescue every few years and keep student loan interest rates low.

Downsides to Student Loan Consolidation

The biggest disadvantage to student loan consolidation is that the longer term usually means that you repay more overall. If you stick with the shorter 10 year term, and make the higher overall payments, you’ll be out of debt sooner, and probably pay less (assuming interest rates don’t go too high over time).

You can offset this issue by making extra payments when you have a little more money. If you can pay off your student loans in 10 years anyway (with the help of extra payments), and are locked in at the lower rate, you can save money in the long run. But you have to be disciplined in order to make that strategy work.

The Bottom Line

Interest rates on student loans may rise July 1. Even if the rate increase is avoided this year, there’s a good chance that student loan rates will rise at some point in the near future. No politician is suggesting that the student loan interest rate be set low permanently, so at some point during the course of your repayment, you’re likely to be hit with an increase.

How have you prepared for the potential increase in interest rates? 

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  • Amanda L. Gehlert says:

    I consolidated my loans while still in school…I think it was around 2006 or so when student loan interest rates were really low. It was a no brainer…the portion I was able to consolidate is about 2.5% It appears all graduate student loans are fixed at 6.8% nowadays. Also, I wasn’t in a rush to buy a house (as if I’d have the money) back then so while my credit score is important to me…I didn’t worry to much about it in terms of the affect of consolidation.

  • Liz Gross says:

    Actually, if interest rates rise it will only be for newly disbursed, subsidized Stafford loans. Anyone who already has a federal direct loan will not see their rates rise; they are fixed-rate loans. Here’s a good summary:

    (disclosure: I work for a student loan servicer, but this is a personal comment)

  • Property Marbella says:

    Student loans are something that many abuses and do not understand that it must paid back with interest.
    Best to work while you study, and perhaps let the studies take a year or two longer, but be debt-free when you graduate.

  • Anton Ivanov says:

    It’s definitely something to consider if you have many different student loans, as opposed to 1 or two. I’ve never consolidated mine and I’m generally against it, but with the rising interest rates it may make more sense…

  • Jon @ MoneySmartGuides says:

    I consolidated my loans way back when I graduated. I locked in a 3% interest rate. The lower monthly payment was nice at the time (due to the lengthened term) but once I landed a full time job, I upped my payment amounts so that I wouldn’t fall victim to paying more overall through a longer term.

  • Jonathan says:

    Great summary. Like anything relating to debt consolidation it’s all about what works best for you. For some this approach won’t work because it saddles them with more debt for a longer period. However the prospect of lower monthly repayments is something that is very attractive 🙂

  • Debt Blag says:

    Also, are you sure they can raise interest rates on already disbursed loans? Seems like they’d need to a new contract for that…

  • Debt Blag says:

    Please toss the word, “undergrad” in there somewhere. My six figures of grad school debt is at 6.9% and 7.9%; by comparison, 6.8% would actually feel kinda nice.

  • JNouvel says:

    There is NO way to prepare! The Bottom line is – I’m ****ing hosed!!!!

    I’m stuck in dead-end job, with no extra money to pay the loans down and already barely making ends meet as is. There’s no guarantee that interest rates won’t go sky high, no one at the top really fighting to change the system, and pretty much no option or hope. This is pretty much indentured servitude!

    This is the next bubble. And unless MAJOR action is taken immediately – It will burst. And for those of us already in a bad situation, it will likely only get worse!

    For me, having kids, buying a home and stimulating the economy in a traditional fashion is now about as likely as waking up with a unicorn in my backyard tomorrow.

  • Daniel C. Miller Attorney says:

    I can’t imagine paying on student loans for 25 years, especially with a higher interest rate than they are at now. Glad I am done with schooling!

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