I’m dumb for consolidating my student loan

April 22, 2009 · 12 comments

One of the worst days of my life occurred two years ago this month. I was in my senior year of college and life was good, that was, until I got a piece of paper in the mail that rocked my world. It was a tiny white envelope from my school’s financial aid office. It said I had a mandatory student loan exit interview to attend prior to graduating.

No big deal right? Wrong! I sat down for my exit interview and was given a piece of paper  summarizing my student loan balance. This was the first time I saw the damage in it’s entirety, sitting there laughing in my face. It was a dark day in my life. I was a month away from graduating, had no employment lined up, and was told it was time I started making payments on my over $28,000 balance. I felt like I wanted to throw up. Needless to say, I knew I needed to get my priorities in order and figure out exactly how I was going to tackle the intimidating $330 monthly payment.

I did a little research and discovered the world of student loan consolidation. Everything I read (probably from bank websites and Sallie Mae) preached about how amazing it was (let’s just say I didn’t know about PF blogs back then). I saw that it would lower my monthly obligation and lock in my interest rate. Turns out locking in my interest rate was stupid. I locked in at 7% and am kicking myself in the pants. Interest rates dropped the next year to 6% and are now at 5.6%. Even worse, they are scheduled to continue dropping through 2011 to 3.4%.

Shoot me in the face. I would have gladly paid a variable interest rate for four years and then locked in at the 3.4% interest rate in 2011. I ran the numbers and assuming I made minimum payments for 20 years, I would have saved exactly 10 buttloads of money by not consolidating my loans for the first four years and then securing the lower interest rate. 

I have learned that consolidating is not always the best option, especially when you are consolidating at one of the highest interest rates in recent history. Luckily I only plan to be making payments for another two years , so overall it wont affect me too much.

F you Sallie Mae for tricking me into a 7% interest rate, you win this round.

1 Jesse

She is a sly one.

So you are 23 now, and graduated from College two years ago…You were really on the ball back then man, gettin into college right outa high school. Way to go man.

I waited a bit before going and wish I would have just started earlier so I could be done but in the timeless words of Cher, “if I could turn back time…” lol

2 Dr. Faith

My dad actually worked for a student loan company in 2003 when I took out my student loan. (I took mine out in graduate school, not undergrad, one of the luck few to get to our university for FREE! – WEEE!).

Anyway, I was able to lock in at a 3.37% rate, so I was pretty stoked about that. I wasn’t going to consolidate, but my dad told me I was dumb if I didn’t. So I did. I didn’t really know any better, much like you.

But for me, that turned out to be a GOOD thing. Because I’ve avoided the fluctuations. So it really is situation dependent. I would say, that if you can lock in your rate at under 4% do it. 5%, consider it. Over that, forget about it. =)

3 Kyle

It wasn’t always a bad idea to consolidate, when I consolidated my student loans I was able to lock a sub 2% rate which I still have today.

4 Punch Debt In The Face

Jesse- I did feed straight in to college from high school. Graduated college at the ripe age of 21. P.S. please don’t sing Cher again.

Dr Faith- I guess we both listened to the same advice. In your situation it worked out greatly, in mine, not so much :( I agree with your philosophy of when to and when not to consolidate. I would love to have a 3% interest rate!

Kyle- I know it hasn’t always been the case, my sister’s loan is at 2% so she got a great deal. The bad thing about consolidating student loans is you can’t reconsolidate them to get the newer/better rate. I definitely wish I didn’t commit to the 7% interest, yuck. How bout you share the love with that 2% rate you got?!

5 Donnie

I also consolidated at a 7% rate. I don’t even know what my interest rate was at the time, all I knew was every piece of information I had (from all the mail telling me to consolidate my student loans) was that the loan rates were only going to go up, so I should consolidate now, which I did.

My family didn’t know anything about consolidation loans, I didn’t know anything about them, so I just did it.

6 Punch Debt In The Face

Donnie- Unfortunately, I jumped on the same ship as you. If only we had known. At least I know there is one other person out there that shares in my pain.

7 Josh

Man 7% isn’t the end of the world. When you crunch the numbers it’s maybe $600 a year in extra interest you are paying compared to having the loan at 4% (That’s on the full $23k balance). That is $600 less in your pocket, yes, but after looking at your budget it looks as if you have your finances pretty tight there, and you’ll pay it off early.

Give it a couple of years, interest rates will go back to normal soon. I remember a time here in Australia in the early 1990’s when interest rates were hovering around 18%. Now if you consolidated your student loans at that rate, I’d personally come over there and bitchslap ya :)

8 Punch Debt In The Face

Josh- I ran the numbers and on my original $28k balance paid off over 20 years at 7% interest accounted for a total of $52,101 in payments over the life of the loan.

If I locked in at around 3% (which a lot of people locked in at) I would pay a total of $37,268.

That’s a difference of $14,833! To me that is way too much money to spend on something that could have been avoided. However, you are correct, I will not be that affected by my stupid interest rate because I don’t plan on keeping the loan that long.

p.s. if I ever get a loan above 10% for ANYTHING please feel free to bitchslap away :)

9 ashley

Yeah it’s funny how great they make that deal sound, isn’t it?? Of course they’re not going to tell you about the interest rate though. I guess it is convenient to only pay one bill instead of four, but still. Mine is at 6.75%, which I thought was pretty normal until my one friend (who graduated only one year ahead of me) told me his is only at 4%. I don’t have Sallie Mae, but we can punch both companies in the face.

10 Enemy of Debt

Just wanted to stop by and say hello, and share my thoughts on consolidation.

I hate CONsolidation companies. They make you think you are doing something and in the process charge you a HUGE amount of fees. Those fees are bigger than what they supposedly saved you.

We consolidated one time and it became a nightmare! Oh yeah, I HATE Student Loans too. haha. We have almost KILLED all of our debt except for our house and have $3444 left to pay Sallie Mae.

Great Blog!

11 Leif Nabil

Thanks for insight. I’ll definitely be careful with any loan consolidation “deals." I have a question, though. Why can’t you just pay off your whole loan, by “consolidating” into another loan with a different bank (taking out another loan and paying Sallie Mae back all at once)? That way you can lock in at a lower rate.

Thank you!

12 PunchDebt

You actually can't reconsolidate student loans. It's not like a mortgage that I can just find someone else to take them. There have been talks about this changing though.

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