The numbers are in, and according to the Project on Student Debt's latest report, 69% of 2014 graduates had to borrow money to attend college. Those who borrowed came away with debt averaging $28,950, up 2% from the previous year.
The process of repaying student loans can be taxing on multiple levels. First, there's the stress of working those monthly payments into your budget -- a daunting task for recent grads who are bringing home entry-level salaries. There's also the prospect of managing multiple payments from different lenders, which is a route many borrowers have to take. Those who max out their federal loan options or don't qualify to borrow from the federal government typically resort to private loans and often graduate owing money to several entities.
The problem with having to repay multiple lenders is that it increases your likelihood of missing a payment, be it due to a bookkeeping error or a lack of funds. In 2015, 11.8% of those who borrowed money from the federal government defaulted on their loans within three years of their repayment periods. Defaulting on your student loans can seriously mess up your credit, so if you're struggling to keep up with your payments, you may be enticed by the idea of consolidating your student debt.
It's a great idea in theory. Combining your loans means only having to make a single monthly payment, rather than writing checks to multiple lenders. You can also reduce the amount you owe each month to make your payments more manageable. Not only that, but you may be able to lock in a fixed interest rate for your new loan that's lower than the rates your current loans carry.
But there's a downside
While consolidating your student loans may lower your monthly payment, leaving you with more cash for immediate expenses, it will also mean extending the life of your loan. This can ultimately cost you much more money in interest payments, even if you manage to lock in a better rate than the one you're currently paying.
Let's say you're carrying two separate loans, each in the amount of $10,000 with a 10% interest rate. You'd be looking at two monthly payments of $132.15 each, or $264.30 total. Over a 10-year span, that translates into $31,716 in payments, with $11,716 in interest.
Now let's assume you can't swing that monthly payment and want to reduce it by consolidating. You might find a consolidation program where your interest rate is lowered to 8.25% over a 20-year span, in which case your total monthly payment would be knocked down to just $170.41 for a monthly savings of almost $100. However, if you go that route, you'll wind up paying a total of $40,900 for those two $10,000 loans -- and a whopping $20,900 in interest.
Another problem with student loan consolidation is that you can generally only do it once, so if interest rates drop after you lock yours in, then you could lose out on a lower rate long-term. Finally, if you hold federal loans, consolidating could mean forgoing some of the flexibility that comes with borrowing from the government, such as loan forgiveness or income-based repayment programs.
An alternate route to consider
Rather than consolidate your student loans, you might consider refinancing. If you've had an opportunity to hold down a job, make your initial monthly payments, and build up some credit, you may qualify for a lower interest rate for one or more of your loans, which will help lower your monthly payments without extending your repayment period and causing you to pay more in interest over time.
Using our example above, let's say you're able to refinance each of your $10,000 loans so that you're paying just 6% interest, rather than 10%. Doing so will knock your total monthly payment down to $222 per month. While that's just $42 in monthly savings, you'll wind up paying just $6,645 in interest over the life of the loan.
While the idea of consolidating your loans might hold some appeal, remember this: The sooner you pay off your student debt, the sooner you can rid yourself of those pesky payments and move on with your life. Pushing yourself to pay more each month and make those loans go away will save you money in the long run. So, just as you powered your way through college, you can power your way through those monthly payments until they become a thing of the past.
