Martha Said:

Consolidating private student loans?

We Answered:

ylh:

I'm not going to comment specifically on your chances of being approved for a consolidation loan. If your credit is generally good, and your cosigner offers the security that the lenders are looking for, you certainly have a reasonable chance of being approved - but - as I'm sure you know, the lending market is REALLY REALLY tight right now, and many applicants with good credit are being turned away.

What I did want to comment on is the consolidation process in general. I just want to make certain that you recognize that loan consolidation has a "dirty little secret" - and that's all the extra money that you'll wind up repaying on your loan.

There is only one technique that consolidation loans can use to lower your monthly payments - and that technique is s-t-r-e-t-c-h-i-n-g your repayment term. You don't know have to know much about loans to understand what that means - the longer you stretch your repayment, the more interest you pay on your loan.

For the sake of argument, let's assume that you are hoping to consolidate $30,000 of private loans that will enter a 10-year repayment at 8.9% interest. Right now, you would be looking at 120 payments of $378.41 a month.

Consolidate that $30,000 into a 20-year loan at the same interest rate, and your payment drops to $267.99 a month - a savings of $110.42 a month. I'm sure you could put that extra $110 to good use.

But here's the catch - over 10 years, your total payments will be - $45,408.36. How's that compare to 20 years, where your total payments will be $64,318.53?

What's the privilege of cutting your monthly payment by $110 going to cost you? $19,000.

Wow - that's the list price on a Honda Civic, a Mini or a Pontiac G5.

Make that same deal on your government loans, and you're looking at another $15,000 in extra interest. That's quite a lot to pay.

Before you consider consolidation, take a look at your lender's other options, including Income Contingent Repayment, extended repayment, graduated repayment, and the brand new Income-Based Repayment. Do the math, and see which of these might make the most sense for you.

Don't be in a hurry to consolidate - that's just one of several options available to you, and it will prove to be a very costly one.

Good luck to you - graduation's not far away!