Strategy #1 - Student Loan Consolidation

Is this worth doing? Well, there is no simple answer to this question. It really depends upon your situation. I will say, that I consolidated my loans into 1 big (sigh.....very big) loan. I arrived at the conclusion that there were several great advantages to doing this.

1) Only one payment. This is very important especially if you run into a hard patch. Why? Well if you loose your job, break your leg, or need a new engine for your car your payments might be deferred or re-negotiated in some way. Most banks will allow you a few months of interest only or skipped payments. This will of course cost you in the long run, however in a crisis you really have to deal with the moment. However, if you have to apply for this would you rather have to talk to one bank or 3 banks?

2) Only one phone call. Well again, this mainly deals with the rough patch scenario. Think about it.....1 loan one call. If you have to be late or miss a payment for some reason, only one institution will bother you.

3) Increased Flexibility. Student loan consolidation is generally more lenient when it comes to payment options compared to others.

4) Fairly Easy to Get. Unlike other loan reduction methods, debt consolidation for student loans is easily accessible. However if you have ever dealt with a bank, you know that nothing is for certain. You will have to apply and be approved.

Of course, we now have to look at the pitfalls of consolidation, or more importantly maybe, the things to watch out for. Banks are sneaky little buggers if you don't watch them.

1) Will you have to pay back more money? If so how much more? If you are considering a consolidation, go out to your lender and see what they are can offer you. Actually you should try several if they are available to you. You might be shocked at the difference!

Banks will commonly offer you a long payment term with a lower monthly payment. This might seem good on the surface as it gives you a little more cash up front. However this may not be the case.
Let's say you owe $50,000, at 8% for 20 years (ie 240 payments).

Monthly Payment: $418.22
Monthly Principal & Interest Total: $100,372.81
Total of 240 Payments
Total Interest Paid: $50,372.81

Let's say you owe $50,000, at 8% for 15 years (ie 180 payments)
Monthly Payment: $477.83
Monthly Principal & Interest Total: $86,008.69
Total of 180 Payments
Total Interest Paid: $36,008.69

Let's say you owe $50,000, at 8% for 10 years (ie 120 payments)
Monthly Payment: $606.64
Monthly Principal & Interest Total: $72,796.56
Total of 120 Payments
Total Interest Paid: $22,796.56

As you can see, these numbers are pretty self explanatory. Just compare the 20 year term to the 15 year term. You would only have to pay approximately $50.00 more per month if you opt for the 15 year term. This saves you approximately $14,000.00 in interest. Now imagine if you shave 1 or 2% off of the loan by negotiating with the bank. This stuff can really add up.

2) Will you be locked in to bad terms? If the cost of consolidating you loan is a higher interest rate, you might not want to do it. The benefits of having 1 payment / lender might be totally outweighed by a large increase in term, monthly payment or even worse - both. Also, sometimes lenders will penalize you for paying extra money on the principal. For example, if your payment is $500.00 per month, and you have some extra money so you pay $1000.00 that month. Some institutions won't let you do this without a penalty.

Also, some institutions penalize for early repayment. For example say you get a $10,000.00 bonus at work, and you wish to pay the loan off early, you could be facing a "penalty" because the bank is losing interest. You must assess what the lender is prepared to offer you, and if it doesn't make sense don't do it, or better still find a lender that will offer you a better deal.

That's all for now. We will be posting a few more strategies over the next month or so as time permits. Please feel free to contact us if you have a strategy of your own. We would be glad to add it to our list.

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