“Consolidate your loans! One easy payment and no consolidation fee!”
It sounded great to me – only one payment to worry about, no need to worry about whether I had multiple lenders, and it was free – I just had to fill out a simple application. Not to mention I was consolidating through a federal servicer, so I didn’t need to worry about sensitive information getting into the wrong hands or relying on a third party to make sure my lender actually received my payments. And, in theory, all of that was great, but I didn’t actually do the math.
At the end of July 2015, we had just over $22,000 in loans (because we had paid back nearly $7,000 while I was still in school). Of that number, we had $7,302.88 from a Graduate PLUS (federal) loan (interest rate: 7.21%) and $15,603.12 from a Stafford Unsubsidized (also federal) loan (interest rate: 6.21%). If I had kept the loans separate, even if it had taken us the full 23 months to pay off both loans (which is unlikely), we would have paid just $1,525.39 total in interest, bringing our student loan total to $30,525.39 paid back during 10 months of school and the 23 months following the end of school.
We actually ended up paying $2,011.30 in interest because I chose the flashy option of loan consolidation without taking a good, hard look at the numbers. Rather than getting through the 7.21% PLUS loan asap and then having just 6.21% interest accruing on our total balance, we ended up with a $22,106 loan with a 6.63% interest rate. The good news is we only paid $485.91 more due to my oversight, but I can tell you that I could have put that money to much better use than interest on my student loan. And, if we had taken longer to pay off the loan, the gap between what we could have paid (if we had kept the loans separate) and what we did pay would have grown even more!
I hope this brief revisiting of our consolidation experience prompts you to go do the math for yourself. There are some great tools out there to make the process easy, like this loan calculator, so don’t be intimidated by the thought of having to figure out the compound interest on your own. Hopefully, if your larger loans have decent interest rates, you won’t make the same mistake I did – and then you’ll be able to throw that extra cash in the pot to get out of debt even faster – on to bigger and better things!