Episode 30: Consolidating Student Loans. A Good Idea?

Nate and Danielle discuss a listener question about the idea of combining 11 different student loans into one. They look at the pros and cons and offer their advice. They also take a look at the questions you should be asking yourself if you are faced with this type of situation.

Show Notes

Email

I currently have 11 student loans. They are all split up into amounts ranging from $500-$5000 and the interest rates are all different as well.  I am currently not making payments because I applied for an income based payment and it’s basically $0 a month and you pay what you can. My company just emailed about refinancing through CommonBond. If you sign up you get 500 cash and they consolidate and refinance your loans through them.  

I was hoping you could help me decide if this is a good idea. I hear consolidation is not good for student loans because you lose some benefits. But if I were to start paying on my lowest amount (like a debt snowball) I would have to start paying on all of them at the same time which would make my payments over 300 a month. But through CommonBond my payments were calculated for 130 for 20 years.  And they would forgive the rest. 

I’m really not sure what to do and the only advisor I could contact would be through CommonBond and that would be bias. 

Our Thoughts

It’s great that you are looking for ways to pay down your debt. And this seems like a good offer on the surface. Let’s break down the basic math of this first. $130 a month for 20 years is a total of $31,200 paid to the consolidation company.

Things we don’t know:

1. How much your current student debt is
2. An average interest rate of your student loan debt
3. What the new interest rate will be
4. Are there any penalties for paying off early

Nothing to worry about there but having those numbers down will allow you to figure out if this deal actually offers any savings or not. For example, if the interest rate is the same or higher, it’s probably not a great choice.

Pro’s of consolidation

• You only have one check to write per month
• The terms of your loan usually get extended, which is why you get a lower monthly payment (example $12,000 paid back over a year is a $1,000 a month, but paying it back by two years cuts the payment in half, but you are paying for twice as long)
• You could get lower interest rates (you may not as well)

Cons’ of consolidation

• Some federal student loans have special terms that you lose when you consolidate
• Income-based payments go away
• You can get a variable rate loan (don’t do this)

Our suggestion

1. Know your numbers. Get an average of your current interest rates and compare it to the interest rate you will be getting. (If you need help email us back and we will help you run the numbers)
2. If the interest rate is fixed and lower than your current rate, go for it, but know a few things:
   1. Pay as much as you can extra on them each month
   2. Ignore the forgiveness, just get rid of the debt. 20 years of payments means that you could be paying for your college while your child is going to college
3. Check and see that you are allowed to pay off your loan early without penalties 
4. Low monthly payments sound nice, but paying on something for a long time means that you are not putting that money somewhere else (opportunity costs). Getting rid of debt as quickly as possible is the fastest way to build wealth.
5. The $500 put into an emergency fund if you don’t have one and if you do, put it directly on the debt.

NOTE: We suggest paying off early because any debt you carry with you impacts your credit score, home loans, interest rates, etc. Even a little bit of debt can have huge impacts on how much house you can buy.