Student Loan Consolidation

Combining your debts into one super payment could result in super savings - or not

Pop quiz, recent grads! Did you manage to consolidate your student loans by the June 2005 deadline, and if so, do you know which interest rate you managed to lock in? If the answer to the former is yes, then the answer to the latter is probably 3.37 percent. And for those of you who have not yet experienced the giddy joy of your first mortgage, your first car payment or even your first credit card, here's some news for you: that's just about the cheapest kind of borrowed money around.

So what if you didn't consolidate your debt by that date - either because you were still a student, didn't know about the special rate, or just plain forgot? Does that mean you're SOL? Not necessarily. There are a number of advantages (and, admittedly, a number of disadvantages) to student loan consolidation, even in new post-2005 student loan landscape, and it continues to be the strategy of choice for many grads looking to blitz their student debt in a hurry.

So what kind of benefits am I looking at exactly?

If you go to the website for Sallie Mae - the publicly traded lending company and the largest provider of student loans in the U.S. - you'll see that consolidating your student loans could result in a 53 percent reduction in your monthly payments. Sallie Mae offers other incentives as well, including discounts for paying on time each month.

Unfortunately, a consolidated student loan doesn't always mean a better interest rate; in fact, your consolidated loan may sometimes carry a slightly higher rate than the average of your disparate loans. But that doesn't necessarily make consolidation a bad idea, there are other benefits. For example, it's easier to budget around one monthly payment rather than several. And, should you fall on hard times, you'll have only one lender with whom to negotiate a new payment set-up, rather than a whole crew.

Before you decide to consolidate or not, it's important to look at how much of your income is going toward your student loan payments. Most financial advisors will tell new grads that their total monthly payment should not exceed more than about 8 percent of their gross monthly income. (So, for example, if your first job after graduation pays $35,000 a year, the most your monthly loan payment should be is around $235.) If you find this ratio is way out of whack in your budget, you may want to start looking into student loan consolidation.

Typically, you're able to consolidate during:

  • Any point of your repayment schedule
  • Your grace period (usually the first six months after graduation)
  • A period of deferment
  • A period of forbearance
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