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Here’s my situation. Total I have just over $ 20,000 in student loan debt. I’m not having a problem paying (avg. total for the 7 loans is $ 225 but I try to pay double that every month). I have to make three different payments a month. That doesn’t really bother me except I can’t do online bill pay for two of my loans owned by one company.

My concern is the interest. I went through and got offered 6.1% for all seven loans combined. They told me any loan consolidation company just takes an average of the interest rates and that’s how they come up with a new interest rate. This is higher than two of my loans’ interest rate that make up over half of my debt.

My question is: Would I save money by accepting 6.1%?

I have 5 loans at 6.8% fixed. A total of $ 12,000
I have 1 at 6% = $ 5,500
And 1 at 5.6 for $ 2,700.

I got such great advice! Thanks everyone especially Jay P, Dan B, and Alex!

4 Thoughts on Would I save money by consolidating my student loans?
  1. Reply
    July 18, 2011 at 3:02 am

    It’s a gamble. Rates go up and down and consolidation simply locks you into a specific rate. If the rates spike for whatever reason, you’ll be protected via your currently agreed upon rate. However, if rates drop really you and you are actually paying a higher rate than the market average, then you lose out.

    If you feel that you might be paying a higher amount, just do the math and see what makes the most sense. You could always consolidate at a later time depending on what companies you are working with (the gamble is still that the new rate offered at that time might be higher than what was offered now.

    -Good Luck

  2. Reply
    Jay P
    July 18, 2011 at 3:59 am

    Here’s an answer you’re not expecting: it doesn’t matter. You’re obviously paying off the debt quickly. You’re paying off almost $ 500 per month. On a $ 20k debt, that puts you out of debt in just over three years. I’d encourage you to get really intense and speed up this process, but let’s assume that you stay at this pace.

    Let’s suppose you can get a 1% decrease in your rates. Well that’s a decrease of $ 200 per year in interest. Yes, it’s money. But when you’re looking at a $ 20k total debt, it’s really nothing. It’s about $ 16 per month. That also assumes that you carry the full balance for the entire loan. As you pay it off, the interest becomes less and less.

    So if you feel good about only writing one check per month, do it. If not, rest assured that you’re not really saving much money by doing it. Also realize that if the new loan company charges you a loan origination fee or any other type of closing cost, it will likely wipe out any savings you might have had. Personally, I’d spend my time figuring out ways to pile more and more money against this debt rather than how to refi it.

  3. Reply
    Dan B
    July 18, 2011 at 4:55 am

    Impossible to say if you would save money. Those 5 loans at 6.8%. How many are close to being paid off? If they would be paid off in 1 year, then those 5 loans at 6.8% will drop to 3 loans at 6.8%. It also depends upon the original amounts and terms. The average interest on your 7 loans is now 6.5%. But let me give you a rudimentary analysis:

    Loans 1-5: Each one is $ 2,400 @ 6.8%. Assume $ 30/mo for each one. Total interest $ 4,030
    Loan 6: $ 5,500 AT 6%. Assume $ 60/mo. Total interest $ 1,484
    Loan 7: $ 2,700 @ 5.6%. Assume $ 30/mo. Total interest $ 810.
    Total interest for all loans at the above monthly payments is about $ 6,300.
    If you double all payments, total interest for all loans is about $ 2700

    If you consolidate all loans into a 6.1% note and pay $ 500/mo, you’ll pay about $ 2400 interest and have them all paid off in just about 4 years. But you’ll be committed to that $ 500/mo payment for the full 4 years. As it is now, you have the option of cutting back to $ 225/mo if you have a financial emergency.

    If you take the consolidation loan and stay at $ 225/mo, you’ll pay $ 6700 interest for the next 10 years.

    If you take the consolidation loan and pay it off in 5 years, you’ll pay $ 388/mo and interest will be $ 3255.

    My opinion: Since your interest rates are relatively equal, I would look at passing up on the consolidation loan and instead paying the minimum due on higher balances and pay the excess on the lower balance. That will release money early so that you can add those payments to the next lower balance.

    Some may say that you should pay off the higher interest rates first. That would be true if one of your balances carries a 15% rate. But here, there isn’t that much difference.

  4. Reply
    July 18, 2011 at 4:56 am

    You’ve got great answers! I agree with Dan B, I wouldn’t consolidate, instead I’d take a targeted approach at paying off the debts. Prioritize the accounts, make the minimum payments on all debts except #1 on your list. Once that debt is paid off, take what you were paying toward it and put it toward #2 on the list. There are a few approaches to prioritizing debts: lowest balance, highest interest rate, highest minimum monthly payment. Lowest balance will mean paying off one account the fastest. Highest interest will generally save you more money in the long run. Highest monthly payment will mean more money freed up for the next debt. Each of these are valid approaches, which one is best depends on your specific portfolio of debt.

    Since your loans have very similar interest rates, I’d focus on the balance and monthly payment. If you applied that extra $ 225 each month to the $ 2700 loan it would be paid off within a year. However, the information above doesn’t detail each of your accounts. If one of those 6.8% accounts has a balance pretty close to the 5.6% one, focusing on that one may be the best choice, especially if the monthly payment is higher.

    Below is an excel template where you can run scenarios for the order of debt repayment, including the account pay off dates and total amount paid for each scenario. Also below is an amortization table you can use to simulate the consolidated repayment schedule.

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