 One aspect of student loan consolidation that many people like is the ability to extend the loan repayment period from 10 years to 30 years. Monthly payments are greatly decreased by extending the repayment period. But when you consolidate school loans and extend the repayment period, it means that more money will be paid in interest over the lifetime of the loan. Is it better to pay down your student loan faster in order to save money on interest?
Evaluate the opportunity cost of paying down student loans faster
You’d have no debts in an ideal world. But in our real life, it is advisable to organize your debts in a way that makes the most sense for your long term plans. You’ll need to ask yourself what investing possibilities you could be missing out on by funneling the extra money into paying down your college loan.
Saving for a home
Let’s imagine you could save an additional $200 a month by selecting a 30 year repayment term and used that savings instead for a down payment on a home. You would probably earn more over the years on the equity earned in the home than you would have saved by paying down your college loan early.
Paying down high interest debts
Most financial experts say that you should focus on paying down high interest debts first. You get very low interest rates when you refinance college loans through a Federal Student Loan consolidation program. If receive high interest credit cards or loans, it may be more cost efficient to employ the money saved from extending your repayment period to pay these debts down first, and then focus on your student loan.
Just because you extend the repayment period when you consolidate student loans doesn’t mean that you can’t pay off the balance early. When shopping around for a company to refinance your student loans, get to know about any penalties for early repayment.
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