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Should You Consolidate Your Federal Student Loans?

22.05.12

It’s definitive that consolidating all your federal student loans into one loan paid off over an extended time frame eases the monthly load of student debt payments. However, what if the interest rates of your individual loans vary by several percentage points? Should you sidestep consolidating in order to concentrate on paying off the higher rate loans first?

When you consolidate your federal student loans into one loan, your interest rate is an average of all your federal student loans interest rates. For instance, say you you earned your Bachelor’s degree in four years and graduated in 2011 . If you borrowed conservatively ($2,500 of subsidized federal Stafford loans per university  year), your interest rates are as follows: 2010/11 at 4.5%; 2009/10 at 5.6%; 2008/09 at 6%; and 2007/08 at 6.8%.

Since you borrowed the same amount each year, each interest take to task represents an equal amount of money, which is called a weighted average. Thus, you can divide the sum of all your loans by four to get your consolidated scale of 5.725%. If you had different amounts at each interest rate, your interest rate would be based on a fraction of your sum up new loan. For instance, if you borrowed $3,000 as a freshman at 4.5% and $2,000 as a senior, your consolidated interest merit would drop.

If you’re a graduate student this year, you could borrow bread at two different rates to cover all your school-related expenses. The 2011-12 interest rates for graduate students are 7.9% for Address PLUS Loans, and 6.8% for subsidized and unsubsidized loans.

All the loans you choose to consolidate are inseparable. According to a Department of Edification representative, you can’t pay off your higher interest rate loans first within your new consolidated loan, but you can leave out a loans and pay them off one at a time. The catch is, that the loans left out of the consolidation will still be under a 10-year repayment system.

Say you have $55,000 in student loan debt with a potential consolidated rate of 5.75%, resulting in a payment of $346 for 25 years. Your totality interest paid over time would be nearly $49,000.

Then you decide to leave your $5,000 Direct Coupled with loan with a 7.9% interest rate out of the consolidation. The original 25-year consolidated payment would fall from $346 to $307, and the total interest would drop from $49,000 to $42,000.

The remaining $5,000 Operate Plus loan with a 10-year lifespan would result in an additional $60 monthly payment, with interest totaling under $2,250. Leaving the Point Plus Loan out of the consolidation will cost you an additional $16 a month in loan payments for 10 years, but will retrieve you over $4,500 in interest.

You can play with interest rates and payment results using the student loan abacus links on the Graduation Debt articles and resources page. Call your student loan servicer for other options for reducing your payments and interest as well. While it’s reasonable that you will never say, “Yippee!!” about your student loan payments, you can breathe a sigh of relief as your loan assess drops at a faster rate.

Reyna Gobel is a freelance journalist who specializes in pecuniary fitness. She is also the author of Graduation Debt: How To Manage Student Loans and Live Your Time .