When Not to Consolidate Student Loan Debt

To a college graduate, the call to "consolidate" is almost as familiar as her school fighting song. But consolidating student loans might not be as warranted as it was in years past-especially in light of recent rate changes.

Most college students spend a great deal of time with advisors. They receive guidance on class work and their various areas of study. The smart student should also seek out guidance on financial matters- especially if she has student loans.

For the last several years, students have been told to consolidate their loans before a July 2007 rate hike took place. Now that the deadline has passed, many factors need to be considered before initiating a loan consolidation.

Rate matters

The first thing that you want to do is compare the rates of your current loan with today's market. When you consolidate your student loans, a weighted average of all the interest rates of the loans is taken and rounded up to the nearest 0.125 percent.

To find out what your new monthly payment would look like after consolidation, meet with a lending official and/or do it yourself with an online loan calculator. You may discover that the new rates don't justify a refinance. You'll also want to see if the rates on your current loans are fixed. If they are, it may not make sense to refinance everything just so that you have the convenience of one loan payment. If you're uncertain about the terms on your loan, review your portfolio with a lender. Many will be happy to help you, free of charge.

Act quickly for student debt consolidation

Consolidation works most effectively if the transaction occurs within six months of graduation. That stretch of time is considered a grace period for students-they receive a price break if they start repaying their loans during that time. When the grace period ends, the interest rate on the loan increases by nearly 1 percent.

Unfortunately, if you choose the rate discount, you'll have to start repaying the student loans almost immediately after graduation. However, there are lenders willing to hold the package until the end of the grace period. Check with your bank to see if they have the same policy.

Long-term costs vs. consolidation

Ultimately, you'll need to determine your top priority. If you need low monthly payments on your loans, you may want to consider refinancing and stretching out your loan terms. However, if you'd like to be rid of a monumental debt as quickly as possible, you can opt to keep your loans at their current rate and pay down your principal.

As any academic advisor will tell a student, there are many variables to consider when making a decision. When it comes to student loans, take a good look at your current financial situation and consider your short-term job prospects. Don't jump at the easy money that a consolidation can bring. The best advice dictates that you understand all the factors at play before you make your consolidation decision.