The student loan industry is on fire lately.
Every day, thousands of people are moving out of college into the workforce and they have to start paying on their student loans.
There’s a problem though.
The rate at which they are required to pay back their government back student loan is too high when you compare it to the average income.
According to Payscale.com the average 4 year degree earns $43,200.
That’s $3,600 a month.
But, when you factor in taxes, healthcare, 401K, and insurance, you’re probably looking at roughly $3,000 a month in take home money.
Then you look at the cost of living:
- Car payment
- Car insurance
- Personal Expenses
It’s no wonder people are struggling to make a $400 a month student loan payment.
In fact, in a recent study more than 3,000 a day default on their student loan payment.
3,000 a day…
That’s a pretty scary number when you think about the big picture.
Luckily though, the government provides student loan borrowers with a few options when it comes to repaying their student loans.
The one I’m describing in this article is called a student loan consolidation. If you’re more interested in refinancing your student loans you can read this article.
The idea of consolidating your student loans is a pretty easy one.
Consolidation is the process of taking multiple student loans and combining them into one loan.
One way to think about it is if you were going to consolidate credit card debt.
And there are several benefits to doing this.
So if you ever catch yourself asking “Should I consolidate my student loans,” take these benefits into consideration.
Benefit #1 – Pay Less Interest
Let’s look at an amortization schedule to start:
Below are two pictures.
There are columns in each including month, payment, principal paid, interest paid, the total interest, and the balance left afterwards.
We’ve used the easy numbers to simulate what an average student repayment schedule would look like.
- $30,000 in debt
- 6% Interest rate
- 10 year term
When you start making payments it looks like this:
You can see in the beginning the a large portion of your payment goes towards paying off your interest.
Which means your servicer gets paid healthy once payments start.
In fact after paying $4,329.78 in your first year you’ve only paid $2,452.52 towards you $30,000 balance.
But as time goes on your principal accelerates.
This is what the last year of your payment schedule would look like:
You can see the amount of interest towards the loan dramatically falls in the later stages of the loan.
And at the end of you you end up paying $9,967.20 in interest on a $30,000 loan or a 1.33 factor.
One of the primary goals of consolidating your student loans is to lower your student loan payment.
One way that is accomplished is by paying less interest on your new loan.
When you consolidate you have the ability to switch out older, variable rate federal loans for one fixed rate loan.
This can potentially give you protection from having to pay higher rates in the future if interest rates go up. And it looks like interest rates are already moving up this year in 2017.
Simply put, the lower your interest rate, the more of your money go towards principal.
You pay down your loans faster and your servicer (the entity holding the note) keeps less of your money.
Up until 2006 the Federal Government was issuing variable rate loans.
If you do have a variable interest student loan, you’ll want to consider getting with some student loan consolidation companies to help you.
Benefit #2 – Lower Your Monthly Payments
Are your monthly payments too high?
Are you barely able to afford them?
Are you having to choose between paying your student loan bill or your car payment?
It’s possible to lower monthly payments by:
- 1) lowering your interest rate
- 2) lengthening your term.
Keep in mind that by choosing a longer repayment term, you’ll end up paying more interest but it will give you breathing room to save more, and live a little easier.
Think about it the same way you think about a car payment.
Let’s say you’re buying a car and it’s $20,000 with a 5% interest rate (for ease of computation).
And let’s say your considering paying back the $20,000 over 5 years or 6 years.
It looks like this:
If the car dealer asks you whether you want to pay it back over 5 or 6 years you can save $50 a month by extending your term.
But when you do the math you actually pay back $546 more over the life of the car note.
In option A) $377.42 X 60(months) = $22,645.20
In option B) $322.10 X 72(months) = $23,191.20
Some people prefer the lower monthly payment to keep more cash in their pocket short term.
Others prefer to pay less interest and take the shorter term.
When you consolidate your student loans, many times you stretch the term out to 30 years as opposed to the 10 years that the government issues student loans.
This lowers your monthly payment.
If you’d like a reference to a federal student loan calculator, you can go here.
Benefit #3 – Reduce the Number of Bills You Pay Each Month
When you consolidate your student loans, you are combining many loans into one loan.
This makes your repayment easier.
In fact, the average student has 8 different student loans across 3 different servicers.
That’s 8 different loans.
Each one has it’s own term, interest, and monthly payment.
Think about it, each semester you probably took out a new Federal Student loan.
Every semester, if you’re a student loan borrower, you received a lump sum of money into your checking account.
That’s an individual loan.
Many times student graduate without knowing how many “lump sums” they received.
Some don’t even know who is holding the note and when they are required to start paying them back.
So when students default, many times it’s a factor of ignorance.
We’ve put together a great resource for finding out what you actually own in student loan debt.
It’s a step by step guide that shows you how to pull this information from the federal data base.
Here’s a snapshot from it’s table of contents:
Benefit #4 – Remove a Cosigner
When you graduate college, your parents may want to remove themselves from your financial responsibilities.
We know… bummer.
Something that happens frequently is upon graduation your parents no longer want to be a co-signer on your loan.
Typically parents are cosigners on student loans because students have no income, generally limited credit history, and lenders don’t know whether or not they’ll get paid back.
Hmmm wonder if that’s part of the reason 3,000 student loan borrowers default each day…??? (sarcasm)
That’s another story.
This is called a Direct PLUS loan.
You can read about it right on the studentaid.ed.gov site here.
So, if you’re a parent and want to remove your personal responsibility from your child’s student loan OR if you simply want to remove a cosigner from your loans, one way to accomplish this is by consolidating into a new loan.
When the old loan is paid off by the new lender, the cosigner is no longer on the hook for the new loan.
By this time, the (then) student now has a job, a bit more credit history, and is a more “attractive” lending risk to the new servicer.
Which leads me to….
Benefit #5 – Get a New Servicer
There are a lot of student loan servicers.
Some are good. Some are not.
In fact, if Navient is your student loan servicer, make sure you read this article about how Navient defrauded millions of students by being accused of the following:
- Knowingly giving student loan borrowers incorrect information
- Ignoring complaints and requests
- Processing payments inaccurately
- Steering students towards a repayment plan that worked better for them as opposed to the student.
The Consumer Financial Protection Bureau is currently suing them.
That’s just one example of what a nightmare it can be if you’ve got the wrong servicer.
That said USSLC only works with the best servicers in the country. We have great relationships with our lenders and they treat our members like family.
This means better communication, more transparency, and a higher likelihood of success in getting those student loans paid off in a timely manor.
Each month thousands of students consolidate their student loans.
One thing to keep in mind when considering a consolidation is remembering that over time you will end up paying more towards that loan.
But, if this allows you to live a little easier each month or prevent wage garnishment or judgement, it’s a no brainer.
Above we’ve detailed out the top 5 benefits to a student consolidation loan.
If you’ve got student loans I encourage you to check out the resources in this post as they’ve been responsible for helping thousands of students here at USSLC.