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The Nuts and Bolts of Student Loan Consolidation

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I’ve recently received a lot of questions about student loan consolidation.

So without further ado, here's how consolidated student loans work!

Most have heard the term "consolidating" in reference to their student loans. However, too often, I listen to people confuse consolidation with refinancing. Technically speaking, the two are not the same.

Consolidation is the process of combining multiple Federal student loans into one simple payment. It calculates the new interest rate as a weighted average and also extends the term of the loan.

If the total balance of the consolidated loan is less than $30,000, the new term would be 15 years or 180 monthly payments. If the balance is greater than $30,000, the new term would be 30 years or 360 monthly payments. Regardless, both fixed and graduated repayment options are available. Extending the loan will decrease the monthly payment.

Note: taking longer to repay your debt shouldn't cost you wealth in the long run as long as you save the difference between the two payments (full explanation here

Let's go through an example.

Susie has two Direct Federal Student loans, each for $25,000 on the default 10-year fixed repayment plan. One loan has an interest rate of 6%, and the other an interest rate of 4%. Their monthly payments are $278/mo and $253/mo, respectively, totaling $531.

After she consolidates, Susie has one loan for $50,000 at a 5% interest rate (.5(6%)+.5(4%)) stretched over 30 years. She chooses the fixed repayment option and drops her monthly payment to $268/mo.

Consolidating is an excellent option to lower your monthly payment and increase savings.

There you have it, the nuts and bolts of student loan consolidation!

Stay savvy, my friends.


P.S. If you’d like to set up an online meeting to speak with me about your unique situation, please click this link to reserve a spot on my calendar!


2020-92286 Exp 01/2022

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