For Or Against Consolidation - What All Graduates Should Know About Student Loans Consolidation

During this period of the year, a lot of new graduates start to ask if they should consolidate their federal student loans or not. This is a huge decision on their part for several reasons. It is not just a longstanding financial commitment, but also an irreversible undertaking as well. Graduates wonder all the time whether they can re consolidate their federal Student Loans.

This question has a very simple answer; if the graduate took fresh Stafford loans in addition to the consolidation, they should then be able to to amalgamate the past consolidated loan with their present Stafford loan. Nevertheless, this will not change the interest rate on their past consolidated loan. The interest rates is calculated using a weighted average. Let us take a typical case:

The graduate consolidates some loans in 1995:

$35,000 with a fix rate of 4.5% (This is a hypothetical rate)

The graduate then goes back to college and takes another loan:

$30,500 Stafford loan with a fixed rate of 7.8% (This is a hypothetical rate)

$22,000 grad plus loan with a fixed interest rate of $9.5% (This is a hypothetical rate)

Now the graduate thinks of consolidating all three loans together:

• $35,000 at 4.5%
• $30,500 at 7.8%
• $22,000 at 9.5%

Their interest rate is determined by calculating the weighted average of they loans:

1st step: Calculate annual interest  on each loan

• 35,000 x 0.045 = 1,575
• 30,500 x 0.078 = 2,379
• 22,000 x 0.095 = 2,090

2nd Step: Add the annual interests together

• 1,575 + 2,379 + 2,090 = 6,044

3rd Step: Add the principal amounts together

• 35,000 + 30,500 + 22,000 = 87,500

4th Step: sum of interests divided by sum of principal amounts

• (6,044 / 87,500) x 100 = 6.907

5th Step: Round it up to obtain the nearest 1/8th

•  6.91

As a result of having different rates on the various loans, the ineterest rate is calculated based on the weighted average on the different rates.There is no condition that permits the graduate to reconsolidate a previously consolidated Federal loan. Such a loan will remain at its interest rate for the lifetime of that loan.

Now to come back to the graduate's question,should they consolidate their loans? The average university graduate will come out of school with approximately $20,000 in debts. This translates into a monthly repayment of $231. Therefore one of the important questions to take into account is can they afford $231 per month over a 10 year period? Or will it be more practical for them to undertake consolidation, and pay $154 per month over a 20 year period?

My personal advice is that, if they can't afford it, the logical thing to do is to consolidate their student loans now. This can reduce their monthly payments bIn the future when they start earning more, they wouldn't have much problem paying it off.