Student Loan Consolidation: Lower Monthly Payments or a Shorter TermReviewCompareAdviceCalculator

Student Loan Consolidation: Lower Monthly Payments or a Shorter Term

Consolidating your student loans is an easy for you to manage your finances. Not only can this make repayment more manageable, as you often go from making multiple payment to just one, you can also reduce your monthly payments and potentially lower your total loan costs.

When faced with this possibility, it's important to understand how consolidation affects your finances in the short and long term. This can help you decide the best course of action for your needs. Below is a look at different scenarios and how consolidation can affect your finances in each case.

Student Loan Consolidation: Lower Monthly Payments or a Shorter Term

Private Student Loan Consolidation

Unless you have near perfect credit, you'll likely pay more to borrow private student loans since their interest rates can be much higher than what you would receive with a federal loan. This means often times if you can consolidate your private loans it will be beneficial, particularly if you can receive a lower interest rate.

Federal Student Loan Consolidation

The main benefit of consolidating federal loans is you make it easier since you make only one payment a month in lieu of multiple ones. There's also the added incentive in that you can stretch your loan term out to 30 years, which will reduce the monthly payments. This can create room in your budget to comfortably make your payments each month as well as set aside money in emergency savings.

However, while lower monthly payments create more room in your budget, is it worth it? These illustrations below explain why lengthening your loan isn't the best financial decision you can make.

Lower Monthly Payments vs. Shorter Term Loans

Say you have the average student loan debt of $30,000 with an interest rate of 6.00% APR and you decide to stretch your loan term out to 30 years to reduce the amount of your monthly payments. This would make your monthly payments $179.87 while your total loan costs– the amount of money you'll actually pay for borrowing – inflates to $64,751.46.

Meanwhile, say you decided to pay a higher monthly payment with the goal of paying off the loan in 15 years. Using the numbers from the example above your monthly payment would increase to $253.16, which isn't that substantial of a difference. However, you total loan costs would be $45,568.27, saving you a staggering $19,183.19.

Therefore, for a slight increase in the monthly payment, a shorter term loan will save you significantly more money in the long run than stretching out your loan for lower payments. With this in mind, here are some tips to help you with consolidating your loan:

  • First, shop different lenders to see their student loan consolidation rates and terms. This can help you identify the best short-term option for you.
  • Next, create more room in your budget to make the higher student loan payment. If this means cutting back on some items or forgoing other expenditures, by all means do it especially when you consider how much money you can save.
  • Lastly, consider applying a small additional amount of money for each payment. If you started making payments today and applied an extra $50 per payment, instead of paying it off in March of 2028, you'll pay off the loan in December of 2026, saving you over a year of payments.

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