Should Your Student Loans Be Consolidated?

It's Time To Check The Interest Rate On Your Student Loans

The good news for Americans is that Biden has once again pushed back the federal ban on student loan interest. But there's some bad news: You'll only have another six months to figure out how to deal with it. But don't worry—even if interest rates are going up, they're still historically low. If you took out student loans at a high interest rate years ago, the best option is to consolidate them before your payments resume.

Consolidation of student loans is when you combine all of your existing loans into one new loan to pay them off. You have a variety of federal and private choices available to you. The purpose of consolidation is usually to reduce your monthly payment, but it may also help you save money by lowering the amount of interest you'll pay over the life of the loan. It is all about what you want to achieve.

If your monthly expenditures have risen during the pandemic, a lower payment is unquestionably a positive thing. However, there are several methods to reduce your expenditure—and if you're not careful, the solution might end up costing you more in the long term.

Let's assume you're in a financially strong position and can afford your existing payment, but your debts are from an earlier era when interest rates were higher. Today's lower rates apply to the same length and principal, resulting in a lower monthly payment for you.

Now consider if you need to make your existing payment even smaller and whether you're ready to stretch out the term in order for it to happen. Perhaps you were only qualified for a 10-year mortgage before but now have the option of consolidating into a 20-year term. Even if interest rates are higher, your recurring payment may decline. The down side: You must decide if it is worth paying the additional cost of another decade's worth of debt.

Let's crunch some numbers. A $50,000 loan with a 5 percent rate and a 10-year term generates a monthly payment of $530.33. To stretch the term out to 20 years, the monthly payment is over $200 less monthly. But you pay interest on the loan throughout that period.  So, with the first loan, you pay $13,639 in total interest; with the second, you pay $29,195.

There's one more catch to consider when it comes to consolidation: Federal student loans come with special perks, such as a variety of repayment and forgiveness alternatives (and the possibility for a US president to propose an interest-free moratorium on repayment during a crisis!), which may not be transferred to your new loan. If you consolidate your federal student loans with the Direct Consolidation Loan program, you'll keep those. You won't find anything if you look elsewhere.

Choose the strategy that's best for your financial goals. Just keep in mind that there's nothing more expensive than a missed opportunity.

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