Is Consolidating Student Loan Debt Actually Helpful?

The Federal Reserve has been busy this year. As you might recall, it slashed interest rates several times in 2019, with the most recent one coming just weeks ago. And though consumers with poor credit may have a difficult time taking advantage of lower interest rates on larger purchases, any type of rate cut is usually good news for those about to embark on one of these big purchases. We’re talking a home mortgage, auto loan, or even a new student loan.

Speaking of student loans, now could be a great time to consolidate and lock in lower overall interest rates. But first, you need to figure out a few things:

  • Are your loans held by the federal government or a private lender? Federal student loans have fixed interest rates, while loans from private lenders can be either fixed or variable. While the majority of student loans are federally held, it’s estimated that nearly 1.5 million Americans also have borrowed from private lenders.
  • Are your loans fixed or variable interest rates? Loans with variable interest rates experience the ebbs and flows of the market, so you’ve likely already seen a dip here.
  • What is the current interest rate of the loans you’re paying? The one big benefit about federal student loans is that they generally come with lower interest rates compared to private loans. A fixed interest rate private loan, for instance, can range anywhere from 3.8 percent to 13 percent. The higher the interest rate of your privately held loans, the more incentive to consolidate while rates are low.

Does Consolidation Make Sense?

Is your credit score good? Are you willing to part with some of the protections offered with federally-held loans, such as hardships you can claim that pause payment until you can get back on your feet (if you ever fall on hard times, that is)? Are your loans currently on an income-based repayment plan?

The aforementioned are all factors that you’ll need to weigh before making a decision on consolidation. It’s not all about a reduced interest rate. Here’s some other things you should be considering before consolidating:

  • Choose term over payment reduction: When some consumers consolidate, they’ll often get a lower monthly payment, but a longer term period. Ideally, consumers should try to consolidate so the payment is lower and the term limit is shorter. Even if your payment is lower, you don’t want to be significantly extending the period in which you’ll repay the loan.
  • Make sure the interest rate you consolidate at is lower than that of the other payments’ average: To determine this, average out the rates that you’re paying now and put them up against the interest rate on the new, consolidated payment. You obviously want the new consolidated interest rate to be lower than the current average of what you’re paying. There are several consumer websites that can help you better determine how much — if any — of a savings you’ll be privy to should you consolidate.
  • Shop around and ask questions: Above, we mentioned how if you consolidate federally-held loans to a private lender, you might lose some of the protections the former offers. On this note, you really want to be sure that what you’re getting into is going to be a good fit. For instance, many private lenders offer similar protections. They may also offer some value-added benefits, such as interest rate reductions after a pre-determined amount of the principal balance has been paid off. Shop around to see what lender works best for your situation in some of the intangibles that exist beyond the interest rate.

With some lenders offering student loan consolidation rates as low as 3.5 percent, it makes sense to explore things if you’re in a position to do so. But it might not be as much of a slam dunk as you think it may be. Make sure you do your homework, and weigh the pros and cons of any consolidation decision so you can experience the maximum payoff.

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