School loans are a necessary evil for most people. They begin paying them six months after graduation and don’t stop until 10, 20, or even 30 years later. By the time they’re finished, they’ve paid double what they originally borrowed. It’s unfortunate but for many people it’s the only way.Luckily, there is a way you can reduce the total amount of money you pay for your student loans. You won’t be able to lower the amount you owe, but by consolidating your loans you can benefit from some cost saving incentives.For instance, when you graduate you usually have many small loans from a few different lenders, each of them at their own interest rate. By consolidating you combine all those loans into one large loan through one lender. When you do this, your interest rate is averaged out, and fixed at a rate lower than some of your previous loans. It might not seem like a big deal, but over the life of your loan, you’ll save thousands.When you consolidate your debt with a single lender they stand to make more from your loan, which means they have the room to offer you discounts and incentives. They do this mostly to set themselves apart from competing lenders, but in the meantime you benefit with reduced interest rates, flexible payment plans, and good standing incentives that will lower your interest even further.Consolidated loans usually allow you to have some flexibility in your payment structure, meaning you can adjust the loan term to be shorter or longer. Adjusting the term will also adjust your monthly payment adversely. For instance, if you make the length of the loan longer, your monthly payments will shrink. This may seem like you’re saving money, however you are paying more interest on a longer term which means in the end it will end up costing you more.On the flip side of that, if you restructure your payments so you’re paying more each month, you’ll pay off your loan sooner and pay less in long-term interest. Nearly all consolidated loans have no prepayment penalties either, so you should make sure your lender won’t penalize you for paying your loans back early.An indirect way that consolidating your loans can save you money has to do with where you apply your funds. If you’ve consolidated and restructured your loans to the point where you have a very low interest rate, along with low monthly payments, you can potentially invest the extra money and earn a percentage point or two or three above your loan’s interest rate. It may only start off as a few extra dollars a month, but again, over time those pennies add up.
Before you consolidate your student loans, you should research your situation and be sure you know what consolidating them will do. For instance, while it’s usually a good idea to consolidate both your federal or government school loans and your private school loans, they should never be consolidated together into one loan. The reason for this is simple.Federal loans have many benefits when consolidated that you don’t get with a private loan. Consolidating them together causes your loans to become a single, private consolidated loan, forfeiting all the benefits of the federal loans.For example, when you consolidate federal loans you’re eligible for lower, fixed interest rates that are not always available with private loans. Consolidating the two together will prevent you from locking in your interest rate because you’ll lose the government guarantee that’s attached to all federal loans. Then your rates will be subject to change, and can potentially get much higher.Also, interest paid on consolidated federal loans is eligible for tax deductions. If you consolidate them with private loans you will no longer be able to claim your interest which could amount to hundreds of dollars in tax deductions every year. Overlooking this would be a costly mistake.To be sure you’re not making a mistake by consolidating your loans, take the time to research the facts and check with a few different lenders to see which is best for your student loan situation. Don’t pick one to consolidate with until you’re satisfied you’ll be taking full advantage of as many loan consolidation incentives as possible.If you can, try to get your fixed interest rate as low as they’ll go on the federal loan, and set up the payments so you are paying as much as you can afford each month. This way your loan will be paid off as soon as possible.Unfortunately you won’t have as much flexibility with your consolidated private loan. Which, of course, is why it’s recommended that you consolidate federal loans separately from your private loans.