05.15.07 | For and Against Loan Consolidation…What Every Graduate Should Know
It is about the time of year when recent graduates are wondering whether or not to consolidate their Federal student loans. It is a big decision for multiple reasons. It is not only a long term finance plan, but it is not a reversible decision either. People call in every day asking if they can reconsolidate their Federal Student Loans. The answer to this is simple; if you have new Stafford loans to add in to the consolidation, then you can combine your previously consolidated loan with your current Stafford loan(s). However, this is in no way changing the rate of your previously consolidated loan. The way that the rate is determined is through a weighted average. So for example:
You consolidated some loans in 2002:
$23,000 fixed in at 3.5%
You went back to school and took out:
$18,500 Stafford loan at a fixed rate of 6.8% (this rate is set by the Feds, and can change every July 1st)
$10,000 grad plus loan fixed at 8.5% (this rate is set by the Feds, and can change every July 1st)
You are now thinking about consolidating these all together:
- $23,000 @ 3.5%
- $18,500@ 6.8%
- $10,000@ 8.5%
Your rate is formed by taking the weighted average of your loans:
Step 1: 23,000 x 0.035 = 805
18,500 x 0.068 = 1258
10,000 x 0.085 = 850
Step 2: 805 + 1258 + 850 = 2913
Step 3: 23,000 + 18,500 + 10,000 = 51,500
Step 4: (2913 / 51,500) * 100 = 5.656
Step 5: round to the nearest 1/8th = 5.75%
So because you have a portion of your loans at a lower rate, and a portion at a higher rate, the interest rate is weighted on those portions. Under no circumstances can you reconsolidate a federal loan that is already consolidated. That amount of loans will be at that interest rate for the life of the loan. So, now we know how the rate is determined - should you consolidate your loans? The example above does not take into account that most student’s Stafford loans are at a variable interest rate that is reset every July 1st. So for someone that has a Stafford loan that was disbursed Jan 2006 and this person just graduated, their rate is 6.54%…this rate, if not locked in by consolidating, will change July 1st. It could be higher, and it could be lower. Here is a list of pros and cons for Federal Loan Consolidation. As with any financial decision, every situation is different, so it is always smart to relate this information to your specific loan portfolio.
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Based on this list, the people who choose to consolidate are usually the people who cannot afford to pay their minimum monthly balance. The average college graduate graduates with about 20,000 in loans - .this is a payment of about $231/month; so the biggest aspect to consider is can you see yourself making a payment of $231/month for 10 years? Or would it make your life easier now to consolidate, pay $154/month, with the hopes of paying down the principal in the future, so you are not taking the allotted 20 years to pay it off. In my personal and professional opinion, if you aren’t rolling in the dough - it makes sense to consolidate now because you can always pay more in the future - when you have it.
Helpful Sites
Student Loan Network
Private loan Consolidation
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Hello,
I am a first generation college graduate. My father was in the military when I was conceived. I was mentally and physically impaired (ruptured disc and depression) when I walked into an Iowa state agency (Vocational Rehabilitation of Iowa) and was, at the very least, encouraged on my collegiate path. It was determined that I had “disabilities†and needed to get an education and career change. I chose a career that I thought was the most practical and would give me the best chance for success. I was in college for eight years where I had no income and was dependant on the loans to survive my curriculum. Upon graduation I found that there were no real jobs in chiropractic like the vocational resource books claimed. I accumulated 156,000 dollars of dept and now 7 years later having earned no money as a Chiropractor I owe in excess of 256,000 dollars.
I support myself by doing construction work when I can find work or when my health permits. I fear that I will be prosecuted or have leans and judgments placed on me. I fear I have no future other than living hand to mouth as before, but now my Social Security eligibility might one day be in jeopardy.
Would you please try to introduce legislation, which will give people like me amnesty from this incredible dept? Or can you look for a law that would provide relief for someone like me who has no hope to repay loans because of physical and mental imparities?
Or could you simply find it in your hearts to negotiate as my representative with the DOE?
I made a horrible mistake. I was misled. I had no one in my family to give me sound guidance. The state agency I trusted to help me become a productive member of society guided me down a path to financial disaster and tremendous debt. I have no retirement, no health insurance, or no consistent income.
I see no way out of this mess.
May 22nd, 2007 | #
Wow! This article explained a lot. I am finishing grad school and didn’t understand consolidation until now. Very helpful; thank you.
June 1st, 2007 | #