Consolidating student loans


Let’s take a look at a few of the pros and
cons of consolidating your student loans. If you have multiple student loans, consolidation
can offer some simplicity to your repayment. Essentially what happens when you consolidate
is that all of your original loans are paid off by your lender and replaced with a single
new loan with new terms. And you can often get a lower monthly payment because you will
have a longer repayment period,so there are some trade-offs to keep in mind. Let�s look at an example of getting a federal
consolidation loan�you can also get a private consolidation loan if you have private loans,
but we�ll get to that in a minute. Let�s say you have fifty thousand dollars
in federal loans. Fifteen thousand dollars in subsidized loans with a three point five
percent interest rate, and then two different unsubsidized loans: a loan of twenty thousand
dollars with a four percent interest rate, and a loan of fifteen thousand dollars with
a five percent interest rate. [Show example, with interest rates.] If you�re not sure about the differences
between unsubsidized and subsidized loans, we cover this in another video. [Flash intro video] Now as you can see, keeping track of these
loans might get complicated�especially if you�re making payments to different loan
servicers. Entering these numbers into the loan calculator
at studentaid.ed.gov�on a standard ten-year repayment plan, you�re going to be paying
a little over five hundred dollars a month. Over ten years, you�ll pay about eleven
thousand dollars in interest on your original principal of fifty thousand dollars. Now let�s say you want to consolidate these
loans. Under your new loan terms, your loans will be consolidated into one fifty thousand
dollar loan�and you�ll have one new fixed interest rate, which is determined by taking
the weighted average of the interest rates on your previous loans, and rounding up to
the nearest one eighth of one percent. In this case, that�s four point two five percent. Now, entering your loan information into a
loan consolidation calculator, you�ll find that consolidating your loans gives you a
new repayment period, which is figured based on the amount you owe� the more you owe,
the longer this repayment period will be. It can vary from ten to thirty years, but
in this [0]case it�s going to be twenty five years. And your new monthly payment will be about
two hundred seventy dollars. That�s a lot less than the five hundred dollars a month
you would have spent on a standard ten-year repayment plan. But, paying two hundred seventy
dollar per month for twenty-five years means you�ll be paying a total of about eighty
one thousand two hundred fifty dollars over the life of your loan. Subtract your original fifty thousand dollars,
and you�ll see you�re paying over thirty one thousand dollars in interest, compared
to the eleven thousand dollars you�d pay on the standard ten-year plan. So while simpler and lower monthly payments
might give you some relief in the present, the trade-off is that it can cost you a lot
more over time. You will also have new loan terms. This means
that you may miss out on some of the repayment benefits you might have been eligible for
on your previous loans, like interest free deferment on subsidized loans or loan cancellation
for special circumstances. But if you do decide to consolidate your loans, it’s good to keep
in mind that you always have the option of paying more than your monthly payment which
can save you money over time, while still having the flexibility of not having to make
the higher monthly payments that you would have on a standard ten-year plan. But everyone’s situation is different. If
you’re struggling to make payments on your original loans, you might consider repayment
options other than loan consolidation, like an income-based repayment plan. Or if you
run into a financial hardship and need short-term relief, you might consider deferment or forbearance.
These options are covered in detail in other videos. Now, if you have private student loans, you
also have private loan consolidation options. They work much like a federal consolidation
loan, except they also take into account your credit score when determining your interest
rate. So if you have a lower credit score, you might be looking at a higher interest
rate. If you�ve just left school, you probably haven�t had the chance to build up a good
credit history yet, so with private consolidation you might get a simpler, lower monthly payment,
but you could end up paying more in combined interest. But if you happen to have a steady job and
have built up a good credit score, you might be able to get a lower interest rate from
another lender than your current private loans, so it might be worth looking into. So while loan consolidation can make your
monthly payments simpler if you have multiple loans with different interest rates, you could
end up paying a lot more if you extend your repayment period. But by comparing the pros
and cons of each repayment plan available, you�ll be able to find out which option
is right for you.

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