During the course of their career, students often take out more than one loan to be able to afford their studies. These loans might vary in amount, interest rates, and even lenders. Having to calculate which loan to pay off first to minimize interest, dealing with multiple lenders, planning for different due dates, it can all get overwhelming. There are many options to help handle the stress of student loan repayment. One often taken is student loan consolidation.
With any major decision, it’s crucial to take a step back, weigh some pro’s and con’s, and look at the big picture. First, let’s understand what student loan consolidation even means, and review its benefits, and also its drawbacks.
Student loan consolidation is a process by which a lender can combine two or more student loans into a single new loan. The resulting interest rate on the consolidated loan will be the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest 1/8 percent. It can be done with federal loans, private loans, or a mix of both.
A “weighted average” is a calculation that considers multiple factors in a data set. In this case, the weighted average of a consolidated loan takes interest rates, loan amount, number of loans, and the balance owed at each interest rate, into consideration.
If Susie has a $10.000 loan with a 6% interest rate + a $20.000 loan with a 4% interest rate will have a lower consolidated interest rate than a $10.000 loan with a 4% interest rate + a $20.000 loan with a 6%.
Each student loan case is different. At times it makes sense to consolidate loans, other times it doesn’t. Here are some pro’s and con’s of student loan consolidation.
As with any other solution for student loans, consolidation has both positive and not so positive effects. While it may not be the best path for everyone, it can be a viable solution for the right cases.
Also, remember that you shouldn’t expect to lower your interest rates, and need to be okay with extending your payment period and paying more in the long run. It's important to carefully consider all of the factors before deciding if student loan consolidation is right for you.