What It Costs

There are generally no costs up front to taking out an educational loan consolidation. The costs incurred, however, are tied to the interest rate. The way a consolidation loan interest rate is set is to be an average of the rates of all of your loans. For example, if you have three loans, and one is at 7 percent, the second one is at 7.5 percent and the third one is at 8 percent, your new loan will combine the balances of all three loans and lock in a fixed rate of about 7.5 percent. While lenders may try to convince you that you will benefit by moving to this “lower” rate, if you do the math over the life of the loan, you should come out at about the same cost for interest when you average in the lowered and higher rates and settle at the median. Further, if you extend the life of the loan, let’s say from 10 years to 30 years, you are paying off the balance at 7.5 percent for an additional 20 years, so this steeply increases the cost of the loan over its lifetime.

Here is a more concrete illustration of how this would work. Let’s say that your three loans are all for 10 year terms and each has a balance of $10,000. With the three different interest rates, your monthly payments for all three loans will total $356.14, and in 10 years you will have paid $12,736.41 in interest when the loan is repaid. If you consolidate these loans into one $30,000 loan with a fixed rate of 7.5 percent, your payment will be $356.11 (but you’ll only have to write one check for the total, instead of three) and the interest paid will be almost exactly the same as you would have paid, or $12,732.37. If you extend the loan to a 20 year term, though, your payment goes down to $241.68 a month, while the interest paid jumps to $28,002.07 (more than double what you would have paid) over the life of the loan.

Will You Benefit?

There are a variety of resources available online that can help you to determine if you a good candidate for a consolidation loan. Basically, if you are having trouble managing your financial obligations and it would be worth the added expense of stretching the payments out for longer or putting them on some type of a graduated schedule, then it may be a beneficial move. You can use a calculator available through FinAid’s Smart Student Guide to Financial Aid to compare your current situation with some consolidation options.

When To Beware

The Internet is ripe with unscrupulous lenders looking to scam graduates. Therefore, you should research any lender you are considering and make sure they are a highly-respected institution. Also make sure there aren’t unnecessary fees being built into the equation. That said, though, keep in mind that while legitimate loans don’t charge any fees upfront, some of them do have origination fees that must be counted in. But these fees will be part of the distribution of the funds and should not be charged to you initially. When it doubt, always double check with the Better Business Bureau, the Federal Deposit Insurance Commission or request more information from the financial aid office at the school you attended.