My Experience with Consolidating Student Loan Debt

Consolidating student loan debt can feel like a daunting task. When I first graduated, I felt uneasy when I started to receive more letters in the mail offering to consolidate student loans than letters offering credit cards. Even though some letters were from my current loan servicer or from familiar companies, I still felt anxious. After all, consolidating my student loan debt would be the biggest financial transaction I had attempted to date. Since repayment lasts many years, I wanted to make sure I got the best deal but also wanted to be able to meet other financial goals.

When I started to look seriously at consolidating, I had several federal student loans. Some were much larger than others and many had different interest rates. I talked with my servicer and knew that I had a grace period of 6 months before payments were due. I decided that was a good time to review the information and make a decision.

I had received some statements that previewed the repayment amounts for each loan. I was concerned because some of the small loans normally would have had a small payment but instead required a higher minimum payment. It seemed like consolidating could be a good way to reduce my total monthly payment.

When I called my current loan servicer and others, I learned that reducing the total monthly payment was one goal that I could accomplish. I could also eliminate the hassle of having to keep up with multiple loans and could have one single fixed payment that would be lower than the total of the minimum payments required for all of my loans. I didnt really care about this last point, because automatic bill payment was also very easy to use to eliminate hassle.

I also learned that instead of a "fixed" monthly payment, I could choose a "graduated" payment. A graduated payment would start lower than a fixed payment in the early years. Then the payment would grow at intervals over the 15 year repayment period. The intervals increased every couple of years.

My salary right out of college was decent but not great. I was sure that when I was armed with even just 2 more years of experience I would be earning more. I was also confident that over 15 years my income would continue to grow. I liked the graduated option.

Picking the right repayment options is very important and should be what you look for in choosing who to consolidate with.

I wanted the lowest interest rate. Lower interest = more money I keep.

I wanted a fixed rate. Avoid variable interest rates! Unless rates are historically very high you get a better deal locking a low, fixed interest rate.

I wanted a lower student loan payment so I could send more of money to pay down higher interest rate loans (i.e. credit card debt, mortgage, auto loan) off faster.

Like many college graduates, I had some credit card debt with interest rates far higher than student loan interest rates. The graduated option let me use more of my monthly income in the early years towards paying those high rate credit cards down faster. Looking back, that is probably the single biggest benefit I reaped from the graduated payment option. Sure, I may be paying a little more total interest over the life of the consolidated student loan debt, but I know I have saved far more on the total credit card interest I would have paid over a longer repayment schedule.

I was also happy that I could consolidate my student loan debt at a fixed interest rate. My individual loans all had variable interest rates. When variable intrest rates are low the payment would be low, but if rates rose high payments could get ugly. Student loan interest rates were very low at the time and I felt that locking at a low fixed interest rate would be wise since interest rates were very likely to rise.

I had found a better way to get a super low payment at the front - the graduated option. Sure, the payment would go up over time in multi-year increments, but at least I knew exactly when it would go up. My payment amount would not rise purely at the whims of changing interest rates.

I had talked with different companies and learned that some offered to reduce the interest rate if you enrolled in an automatic payment plan. Some companies would reduce the interest rate even further after a certain number of payments were received on time. I based my decision of which company to go with on who could reduce my consolidated fixed interest rate the most, but still give me the graduated payment option. Remember, a lower interest rate saves a lot of money in the long run.

I knew it was important not to miss payments so I could have a good credit score. So, I set up an automatic payment schedule through the student loan servicer that would pay the right amount each month. I made sure not to set it up through my normal bank account's bill pay system because I knew the payment would rise in increments at multi-year intervals. I didn't want to have to remember to tell my bank to increase the amount every few years and I did not want my credit to ever show poor payment history.

Since consolidating, everything has run very smoothly for the most part. Unexpectedly, I did end up going back to school later to earn a master's degree. This adventure required taking out a new student loan. Going back to school put my consolidated loan back into deferment, so I didn't have to make payments while in school again!

After I graduated the second time, there was no repeat grace period for the consolidated loan. I quickly looked into consolidating the new loan with the others. I found out that if I did, I would have to start over on getting the consecutive payments that would reduce my interest rate on the big consolidated loan. I was in a better financial situation and the new loan payment amount was not a hefty addition. So, I decided to leave it separate and just add another automatic payment to my list. If I had known I would go back for more education that soon, I might have waited to consolidate. But interest rates were also higher later, so I still think my original decision still proved to be a good one.

If I had not had credit card debt to deal with, I cetainly would have leaned more to a fixed payment instead of a graduated payment. It would be nice to know that each time I get a raise in salary I could have all of it available instead of knowing I need to set some of that aside to be ready for the next payment increase in a year or two. But my motivation was to save money, and paying credit cards sooner was more important.

Looking back, some other things besides credit card debt would have been good to consider if I were in a different situation. If I had planned to purchase a house, car, or other major purchase shortly after graduating, I would want to wait to compare those interest rates to the consolidated student loan interest rate. If the consolidated student loan interest rate was the lowest, then I would still have chosen the graduated repayment option so I could pay more to the higher interest rate loans first. If it was the highest, I would have leaned more to a fixed monthly payment.

Also, if I had not had other debts with high interest to pay off, I might have consolidated differently. Remember I mentioned that each of my loans had a different interest rate and total amount? It could have made sense to consolidate some but not all of my student loans. If I had one or two loans that with much higher interest rates that the others, I would try to leave them separated out - especially if those higher interest rate student loans had small total balances.

Again, in the no other debts scenario, my guiding rule is very simple. Paying down the highest interest loans first saves the most money in the long run. If you can separate out high interest rate loans and consolidate low interest rate loans, then the consolidated low interest loans get a lower "weighted-average" interest rate. Using the "graduated" plan to get a lower payment on the low interest consolidated loan, could let you devote more money to pay off the higher rate student loan debts faster.

Life is amusing and always seems to have unexpected curves. For example, I never expected my IT career to lead to government IT. In recent years, I have noticed that some government agencies are now starting to offer hiring incentives that include paying off student loans or covering the monthly payment. If you are leaning in that career direction remember to try and negotiate for those incentives. If you get them, it might make more sense to keep a fixed payment instead of a low up-front graduated payment, so they can help pay more.

I have also seen recent government efforts in development that aim to forgive the balance of student loan debt for federal employees after they give X years of service. If you believe that effort will apply to you, then you should consider the option of graduated payments, which could set you up to have more of the debt forgiven once you hit X years. I know not everyone follows a federal career path, but you have to admit that it makes a federal carrer a little more interesting to consider. I have also heard of other forgiveness programs for X years of service being discussed that don't apply just to government, but many detials still remain to be flushed out before they can be evaluated.

So, if you get nothing else from my reflections on student loan debt, remember three principles.

1. Shop for the lowest interest rate you can for your student loans. Look for incentives like automatic payments and consecutive on time payments that reduce the rate.
2. Avoid variable rates.
3. Pay of higher interest rates first. (May or may not be your student loans). A graduated option can help, if you use the savings to pay off higher interest rate loans

Finally, think about the future (school, buying a house, career option incentives, whether interest rates are likely to rise in the near future). If any of those things are coming soon, they should influence your decision.

While nobody fanatically loves student loans, I am glad that they enabled my education. I am also glad that there are different consolidation and repayment options for different needs. Find the right options for you. You can successfully consolidate your student loan debt in a way that will work well with other financial goals.