Compare Total Costs of Student Loans Consolidation

Compare Total Costs of Student Loans Consolidation Related Information:

The federal student loans consolidation is a program by which you can consolidate all your eligible federal student loans into one single loan. All the other loans are paid off in full by the lender of the consolidation loan, and you as a student have to make only one monthly payment to your consolidation loan lender.

You can pay off the consolidated loan over a period of 30 years as compared to just 10 years for the student loans. This reduces your monthly payments and helps you to better manage your loans.

Cost of Student Loans Consolidation

There is no fee for consolidating your student loans. The total cost of your consolidation loan depends on the repayment options, interest rates, and the loan amount.

1) Repayment Selection: You can choose from a variety of repayment plans such as:

Standard Repayment: Under the standard repayment plan, you pay the same amount of money (principal and interest) every month for the full term of the loan. An adjustment is made only to ensure that the maximum term is not exceeded.

Graduated Payments: Under this method, payments start with a lower monthly payment, which steadily increases every few years until the loan is paid off. Such a repayment plan is helpful for those who need more disposable income after school or college.

Income-Based Payments: Such payments are based on the individual's annual income and student loan debt. This method suits those who expect their income, and consequently their ability to make higher monthly payments, to increase over the years.

Extended Repayment: Repayment terms of 25 – 30 years are available to those who generally have a consolidation loan of $30000 or more.

2) Interest rates vary from lender to lender but are usually in the range of 2 – 3 % for consolidation loans.

3) The amount of the consolidation loan depends on the outstanding amounts of the student loans that need to be consolidated.

The total principal and the interest that you pay during the entire term of the loan, constitutes the total cost of your consolidation loan. Even though loan consolidation may lower your monthly loan payments, you may end up paying a lot more in terms of interest due to the extended period of the loan.

Comparing Total Costs of Consolidation Loans and Individual Student Loans

Let us see an example. If you had a student loan of $10000 and you were making a monthly payment of $100 over a period of 10 years, you would end up paying a total of $12000 for your loan. On the other hand, if you consolidate these loans and pay a monthly payment of $60 over a period of 20 years, then you would pay a total of $14400 on repaying your loan.

With the above example, you can see that even though you are making a lower monthly payment; the overall payment that you make for consolidating your loan is much higher that your original loan payment.

Before you go for a consolidation loan; it is very necessary to compare the interest rates, payment period, and the total cost of paying the student loans v/s total cost of paying the consolidation loans.

In many a cases, you will be making a higher overall payment for your consolidation loan than for your individual loans. But taking into consideration that you can prepay your consolidation loan anytime without any penalties, and the fixed rates of interest that are much lower than the student loans, it may be worth your while to consolidate your student loans.