Consolidating student loans
A good way to help ease the burden of student loans is to consolidate them into a single loan. Find out how it works, and if loan consolidation is a good choice for you.
Consolidating student loans
Let's take a look at a few of the pros and cons of consolidating your student loans. If you have multiple
student loans, consolidation can offer some simplicity to your repayment. Essentially, what happens when you consolidate is that all of your original loans are paid off by your lender, and replaced with a single new
loan, with new terms. And you can often get a lower monthly payment, because you will have a longer
repayment period, so there are some trade-offs to keep in mind.
[Visual of a time line that goes longer when monthly payments are reduced]
Let's look at an example of getting a federal consolidation loan. You can also get a private consolidation
loan if you have private loans, but we'll get to that in a minute.
Let's say you have $50,000 in federal loans - $15,000 in subsidized loans at a 3.5% interest rate,
and then two different unsubsidized loans, a loan of $20,000 with a 4% interest rate, and a loan of $15,000
with a 5% interest rate.
[Visual of $15,000 in subsidized loans at a 3.5% interest rate, and two different unsubsidized loans. One loan of $20,000 at a 4% interest rate and another one of $15,000 at a 5% interest rate.]
Now, as you can see, keeping track of these loans might get complicated, especially if you're making
payments to different loan servicers. Entering these numbers into the loan calculator at studentaid.ed.gov,
on a standard 10-year repayment plan, you're going to be paying a little over $500 a month. Over 10 years,
you'll pay about $11,000 in interest on your original principal of $50,000.
[Visual showing the amounts of the loans entered in an online calculator and a flag showing the site studentaid.ed.gov]
Now, let's say you want to consolidate these loans. Under your new loan terms, your loans will be
consolidated into one $50,000 loan, and you'll have one new fixed interest rate, which is determined by
taking the weighted average of the interest rates on your previous loans and rounding up to the nearest
1/8 of 1%.
[Visual of the federal loan consolidation of $50,000 at a new fixed interest rate]
In this case, that's 4.25%. Now, entering your loan information into a loan consolidation calculator, you'll find that consolidating your loans gives you a new repayment period, which is figured based on the amount you owe.
[Visual that shows a new monthly payment of $270 with a loan consolidation for 25 years]
The more you owe, the longer this repayment period will be. It can vary from 10 to 30 years, but in this case, it's going to be 25 years, and your new monthly payment will be about $270. That's a lot less than the $500 a month you would have spent on a standard 10-year repayment plan. But paying $270 per month for 25 years means you'll be paying a total of about $81,250 over the life of your loan. Subtract your original $50,000 and you'll see you're paying over $31,000 in interest, compared to the $11,000 you'd pay on a standard 10-year plan. So while simpler and lower monthly payments might give you some relief in the present, the trade-off is that it can cost you a lot more over time.
[Visual comparison that shows a 25-year plan with a monthly payment of $270 with a total interest of $31,250, and a standard 10-year repayment with a monthly pay of $5000 with a total interest of $11,000]
You'll also have new loan terms. This means that you may miss out on some of the repayment benefits you
might have been eligible for on your previous loans, like interest-free deferment on subsidized loans, or loan cancellation for special circumstances. But, if you do decide to consolidate your loans, it's good to
keep in mind that you always have the option of paying more than your monthly payment, which can save
you money over time, while still having the flexibility of not having to make the higher monthly payments
that you would have on a standard 10-year plan, but everyone's situation is different.
If you're struggling to make payments on your original loans, you might consider repayment options other
than loan consolidation, like an income-based repayment plan. Or if you run into a financial hardship and
need short-term relief, you might consider deferment or forbearance.
Now, if you have private student loans, you also have private loan consolidation options. They work much
like a federal consolidation loan, except they also take into account your credit score when determining
your interest rate, so if you have a lower credit score, you might be looking at a higher interest rate.
[Visual that shows the credit score, which will help to determine you interest rate]
If you've just left school, you probably haven't had a chance to build up a good credit history yet, so with
private consolidation, you might get a simpler, lower monthly payment, but you could end up paying more
in combined interest.
[Visual that shows a lower monthly payment in a private loan that could mean more combined interest]
But, if you happen to have a steady job, and have built up a good credit score, you might be able to get a lower interest rate from another lender than your current private loans, so it might be worth looking into.
So while loan consolidation can make your monthly payment simpler, if you have multiple loans with
different interest rates, you could end up paying a lot more if you extend your repayment period. But by
comparing the pros and cons of each repayment plan available, you'll be able to find out which option is
right for you.
Better Money Habits
Powered by Bank of America
The material provided on this video is for informational use only and is not intended for financial or investment advice. Bank of America and/or its affiliates assume no liability for any loss or damages resulting from one's reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment management. © 2019 Bank of America Corporation.