College students graduate with an average student loan debt of approximately $37000. Of course, that’s not the whole story. Millions of college graduates have student loan debts ranging from $50,000 to over $200,000.
With debt like that and sluggish economic growth, it’s no wonder that more than a million people defaulted on their student loans in 2016 alone.
Sometimes, the problem isn’t the debt or a person’s salary. The problem is the way student loans get billed.
Say a student transferred from one college to another, then attended graduate school. She could be getting bills from three or more lenders every month.
If you struggle to keep track of who you owe money to at what time, it’s probably time for you to consolidate school loans.
Let’s jump in and look at some of the reasons why.
Consolidate School Loans to Get One Interest Rate
Student loan interest rates change from year to year. Congress sets them based on performance in the financial markets.
Say you spent four years as an undergrad and six years in graduate school. That means you’re paying student loans at ten interest rates. Depending on when you got the loans, there’s a good chance that some of those rates are higher than the current going rate.
Consolidating your loans lets you lock them all down at a single interest rate. If you time it right, you can trim thousands off the total interest you pay over the lifetime of the loan.
Let’s say you took out $100,000 in loans with an average interest rate of 5%. You’ll pay a little over $27,000 in interest over 10 years. Reduce that average to 4% and you pay around $21,500.
Single Monthly Payment
Another tricky part of owing money to several lenders is that your bills often come due at different times of the month. Paychecks, on the other hand, only arrive twice.
That means you need to stay mindful of both the calendar and manage your budget carefully. It gets even trickier if you end up in a job that pays hourly and doesn’t guarantee hours week to week. That situation makes it almost impossible to create a stable budget or set up automatic payments.
When you consolidate student loans it simplifies that budgeting and payment process. Instead of trying to wrangle three or five or seven payments a month, you can plan around the one student loan payment. You also get a month between each payment, so one week with fewer hours is more annoying than catastrophic.
Potential Credit Score Improvement
The exact math credit bureaus use to calculate your credit score isn’t public knowledge, but some information is available.
One piece of available information is that late or missed payments hurt your credit score. Credit bureaus don’t give any weight to your total income in assigning a credit score. So, even if you make enough to cover those student loans, late payments still hurt you.
The next time you apply for credit somewhere, they’ll consider your income. They’ll also consider that history of late payments and probably give you a higher interest rate to offset the risk.
If you consolidate school loans, all the existing loans get paid off. While inactive accounts might ding your score a little, paying the loans off should help it. You should break even or come out a little ahead.
If you make on-time payments on the consolidation loan, though, that will absolutely help your credit score over time.
One of the hidden dangers of student loan debt is the mental cost. There’s a link between perceived financial strain and conditions like anxiety or depression.
For example, take someone who doesn’t budget their money well. Even if he makes a good salary, he may end paying his bills late. This creates the perception that he’s under financial strain, even if he has enough money to cover his obligations.
At the least, that perception creates stress. At worst, it leads to more severe mental health issues. The fun doesn’t end there.
Stress warps the way people make decisions.
If you put people under stress and offer them a choice, they assign risk in a different way. They don’t give more or equal weight to how things might go wrong. They actually assign more weight to how things might go right.
Since financial strain tends to remain constant, this warped decision-making bleeds into all parts of a person’s life. Someone might start dumping time and money into a multi-level marketing program, rather than picking up extra shifts.
They see the MLM program as a possible route to financial freedom. They give that more weight than the very real possibility that they won’t make a dime.
Consolidating student loans can help people reclaim financial control. Just as importantly, it helps them feel like they’re back in control. The sense of control relieves stress and helps to restore decision-making skills.
Possible Tax Deduction
Some consolidation options offer you tax benefits.
If you own your own home, for example, you can take out an equity loan. You pay off the student loans and the debt gets consolidated into the equity loan.
In most cases, you can deduct the interest you pay on a mortgage or home equity loan. There are some restrictions applied, but a tax professional can walk you through the nuances of what is and is not deductible.
The tax deduction isn’t a good reason by itself to consolidate school loans, but it is a perk.
There are a lot of good reasons to consolidate school loans.
It gets you a stable interest rate for all of your loans. That interest rate may prove lower than what you’re paying on average if you time it right.
It reduced all of your student loan monthly payments into one payment. That makes budgeting easier and more predictable.
It can improve your credit score over time and may provide a tax deduction.
Consolidation also helps to reduce stress, which reduces the odds of depression or an anxiety disorder.
Bonsaifinance.com specializes in personal loans. If you’re looking for a personal loan to consolidate some debt or have questions, contact us today.