The pros and cons of consolidating your student loans

Everyone tries to act like Color Me Badd never happened. But they did. They are a part of music history now. And you liked them. You LOVED this man-band. You liked the guy that looked like Kenny G, you like the guy that looked like the third member of Milli Vanilli, you liked the guy that looked like George Michael, and you liked the guy that looked like George Michael with Vanilla Ice’s haircut. Don’t deny it. It happened.

Ignoring something that you want to forget may be a mildly successful technique when it comes to 90’s man-bands, but it sure as hell doesn’t work for all those student loans that you took out in college. People LOVE to act like student loans aren’t debt. I will have an entire conversation with a new client about everything in his/her financial life, and without fail, they won’t bring up student loans unless I ask about them. Student loans are real. They happened. You didn’t have the money, no matter what the circumstances, to pay for college, and so you borrowed money to get your education. You cannot deny this, and you cannot ignore this.

Once I can get people to come to terms with the fact that they have tens of thousands of dollars in student loans, then inevitably the next question out of his/her mouth is “should I consolidate them?” That’s a fair question. So let’s dive in. Should you consolidate your student loans? Well, every situation is different. I will lay out the pros and cons, and you can decide for yourself. Or, if you aren’t happy with that solution, post a comment at the bottom of this post with your loan details and I will try to answer as many of the comments as I can. Deal? Deal.

Pros

  •  It’s quite possible that you will have a lower payment if you consolidate your student loans. This makes budgeting your monthly income and expenses just a bit easier. But remember, taking out a 10 year car loan gives you low payments too, but that doesn’t mean that you should do it.
  • You only have to make one payment. It is quite common for people to have several student loans. This means that these people have to make several different payments. This bothers some people more than others. Me? I could really care less if I have to make 5 payments rather than one. Wait, this is the “pros” sections, right? Oh yeah. You only have to make one payment.
  • I’ve read in several publications that one of the pros for consolidating student loans is that there isn’t a fee for consolidating your government student loans. Really? That’s a pro? Seems like a reach to me. The reality is that there isn’t a fee for not consolidating your loans either. Why don’t they just say “no one will cut your feet off if you consolidate your loans”?

Cons

  •  If you choose an “extended payment plan” then it’s going to take longer to pay off your loans, and you will have paid a higher amount of total interest.
  • In some cases, consolidating your loans can actually give you a higher average interest rate.
  • People that have already paid off a large amount of their loans will simply restart the interest period by consolidating. The early payments that you make on any new loan, are generally structured to pay the highest percentage of interest (in relation to the loan payment itself). You already know this, but we all tend to forget it. The deeper you get into your loan, the more money (of your payment) goes towards paying off the principal. If you keep restarting a loan, then you keep moving back the time in which the loan will be paid off.

My recommendation

I would recommend consolidating your student loans if you can get a lower fixed interest rate. Don’t fall for the variable rate garbage. Although it seems like interest rates will never go up again, they will. You can only consolidate your student loans once, so it has to make complete sense for you. The final interest rate that you pay must be lower than the aggregate rate of all of the separate loans. You know that weighted average calculation that you learned back in high school? Yeah, you’re gonna need that.

Bottom line: If you are going to do it: do it early, do it cheap, and don’t stretch out your payment schedule too far. You DO NOT want to still be paying for you college when your own child is in college. But above all else, don’t ignore your student loans. They happened, just like your love for Color Me Badd happened. How badd were they? Badd enough to need two d’s in the word badd. Yep, that badd.

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