December 9th, 2009

Dear Credit Karma – Student Loan Consolidation

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Dear Credit Karma,
I just graduated from college and I have a lot of student loans to pay off.  Is a student loan consolidation a good option for me?  What should I look for when choosing the right fit for me?

Student loan consolidation is a “right fit” for your financial life if, with all costs and calculations considered, it is worth it to extend the life and overall cost of your loan in order to save on your monthly payments now.

The biggest benefits of loan consolidation are reduced monthly payments, the convenience of paying one check a month and managing one repayment plan, and the opportunity to lock in lower interest rates than your original loan. But it comes at the cost of spreading out your loan over a longer repayment period, so the added interest on extended payments will add up to a higher overall cost for your college education.

For new graduates like yourself, the benefit of paying less a month, especially if you might not have stable employment or be able to afford paying your current monthly student debt, paying less monthly for loans could make consolidation worthwhile.

To determine if its the right fit for you, calculate the overall cost you will expect to pay if you consolidate your multiple loans, and consider if the money you save in monthly payments is worth the longer payment plan. For example, lets say loans A, B, and C cost you $212.00 monthly for a 10 year repayment plan. You decide to consolidate your loans to a single 15 year repayment plan with a reduced monthly payment of $166.00 monthly. You will spare the extra $46 a month, but you are also paying for loans 5 extra years and could end up paying, lets say, $5,000 more in interest over the life of your loan.

Also, consider the interest rate your lender offers you. If your current loans have variable interest rates and you want to refinance to lock in a low fixed rate now, then consolidation might be a good idea that could end up saving you more money. While federal student loan consolidation does not require a credit score check, lenders for private student loan consolidations do run a hard credit inquiry. So if you are consolidating private student loans and have poor credit, your lender may only offer high interest rates that could end up costing you thousands in the long run; is it worth it to refinance to a much greater overall loan cost for a monthly savings of $25-$50?

If you only have a few more years to pay off or only owe a couple thousand dollars to pay off your loan, then consolidation may be more hassle than its worth if your current payment plan is manageable for you. It comes down to whether you are willing to pay more in the long-run in order to have extra money now to furnish your new apartment or buy your first car.

Check out more resources available online, such as Bankrate’s FAQs on student loan consolidation, to educate yourself more about student loan consolidation before making a decision.


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