When my husband and I were doing our 2014 taxes, we discovered something a bit startling: we spent well over $1500 in just interest on our student loans. Altogether, our payments total over $600 each month, and it pains us to know how much of that is just interest. But we know we aren’t alone, with average student loan debt sitting at $33,000.
As grateful as we are to have had the opportunity to go to a world-class university, it’s painful to watch so much of our hard-earned cash just float away like that.
One option we have considered is student loan consolidation. When we decided to learn more, we had a difficult time finding all the information we needed in one comprehensive step-by-step guide. After piecing together information from various websites and conversations with personal bankers, we learned a lot about the pros and cons for consolidation. Keep in mind, this advice is tailored for federal student loans and might be slightly different with private loans.
The first question to ask yourself is this: why exactly are you uncomfortable with your current student loan situation? Maybe your payments eat up too much of your monthly budget, the interest is building at too rapid a pace, or you have to keep track of a whole slew of different servicers (we have seven). Whatever the reason, if your current situation keeps you up at night, it’s definitely time to think about consolidation. Based on the reason for your frustration, there are different steps to follow.
“My monthly payment is too high.”
If your main gripe is the amount of your monthly payment, your next step should be to contact your current loan servicer to find out about alternative repayment plans.
If you usually don’t have a problem with your payment amount, but are just having a short-term issue, there is the option to postpone your payments. There isn’t a set amount of time that you can postpone them for; it depends on your individual situation. In any case, postponing payments is not a good long-term solution, but it works if you’re in a pinch and know you will be back on your feet soon.
If you want to permanently change your monthly payments to make them more manageable, then you should inquire about the various income-driven repayment plans that are available for federal loans. Some plans offers reduced or even zero-dollar payments based on your financial situation. They might even include a subsidy on the interest so it doesn’t accrue faster than you are able to pay it. If you are already past due in your account, they may also clear some of those delinquent payments.
Federally-backed loans also have the option of loan forgiveness if you work in public service and meet certain eligibility requirements, depending on which types of loans you have. If you’re a teacher or work for a non-profit, talk to a representative at your loan servicing company to find out if you’re eligible.
“I can’t keep up with the interest.”
Maybe you’re comfortable with your monthly payment, but you’re frustrated to see how little progress is being made thanks to that pesky little thing called interest.
When it comes to interest, there isn’t much you can do about it. If you have federal loans, the rates could range from about three percent to eight percent, depending on when you took out the loan. You likely have multiple loans with varying interest rates, so I urge you to take a look at each one individually and compare them side-by-side. Take note of the amount of the balance and whether the interest rate is variable or fixed. The higher the balance, the more important the interest rate is because you will be paying that loan for a longer period of time and there is more principal to charge interest on. If your higher balances also have higher interest rates, it might be worth it to consolidate at a lower rate.
If your higher interest loans have relatively low balances, then you might be better off making extra payments on those loans until they’re gone rather than going through the trouble of consolidation.
“I have too many servicers to keep track of.”
When you first take out your student loans, you have no idea where the balance will end up and who you’ll end up paying. As soon as I graduated, I received multiple letters in the mail from different companies I had never even heard of before, all telling me that I owed them thousands of dollars. It was overwhelming, to say the least. During the first few months after graduation, I was afraid to open my mailbox for fear that there were more places that I owed money to. Together, my husband and I ended up with seven loan servicers.
If your head is spinning with all the different due dates, balance amounts, and login information, I highly suggest enrolling in auto payments so you never miss a payment. As for the different login information, I suggest starting an excel file to keep track of it all. I set up a file that includes all my usernames and passwords, as well as balance information so I can track our progress over time.
The reason I suggest going through all of these steps before jumping into consolidation is because of the many benefits that come with federal student loans. One important benefit is deferment, which means that if you go back to school or join a government program like the Peace Corps, you aren’t required to make payments during that time. Private institutions require payments no matter what your situation looks like. Another benefit of federal loans is that the interest you pay is tax-deductible. So, yes, my husband and I got a $1500 deduction on our taxes. That’s not the case with with a refinanced student loan. These are just a few of the many benefits of federal loans that you will lose if you refinance.
If, after going through the above steps, you are still unhappy with your situation, make an appointment with your financial institution to learn about your refinancing options. Don’t be afraid to shop around at different places to find the best rates (pro-tip: credit unions tend to offer the best rates).
If you choose to consolidate, pay close attention to the fine print and stay away from the lenders who send you flashy advertisements in the mail. Work with someone you trust and be your own advocate when it comes to taking control of your student loans.