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Should I consolidate my student loans in one big loan?

September 27, 2011: 5:05 AM ET

I'm a college student with multiple student loans of different sizes and varying interest rates. My loans aren't in repayment yet. Which is usually the better idea: keep the loans separated or consolidate them into one giant loan with one rate? -- Name withheld

Consolidating your government loans will vastly simplify your repayment schedule and may lower your monthly payments, but it's unlikely to save you money. In fact, it could be a costly move.

With a government direct consolidation loan, you can take up to 30 years to repay your educational debts. But if you're stretching your payments over a longer period of time, you'll ultimately write more checks and pay more in interest. If you consolidate you may also lose benefits offered under your original loan, such as cancellation options.

One advantage of having separate loans is that you can concentrate your financial resources on paying off the highest interest debt first. If you consolidate, the debt will all stand at the same rate. For government loans, that will be the weighted average of the interest rates on the loans being combined, rounded up to the nearest 1/8th of 1% and not to exceed 8.25%.

To consolidate private student loans, you'd essentially be refinancing, taking out a new loan at a new interest rate based on your FICO credit score. "Usually a student's FICO score decreases with each year in school, since their debt increases," says Mark Kantrowitz, publisher of FinAid.org. "Private consolidation generally does not save money until the student's credit score has improved, usually several years after graduation if the borrower has been paying all his or her obligations."

Also, consider the fact that upon receiving a consolidated loan you will need to begin repaying it within 60 days. So you may lose deferment options available on some of your original student loans.

—Allan Chernoff

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