Now that you’ve graduated from college or are nearing the end of your grace period for loan repayment—even if you’ve been making payments on a private student loan for a while and want to refinance—it’s time to start thinking about exactly how you’re going to pay off those student loans. Consolidating student loans is a savvy way to pay down debt efficiently, but it's important to understand the effect the terms can have on your payments and the amount of interest paid.

What's Student Loan Consolidation?

Student loan consolidation means combining multiple loans into a single new loan. With just one payment each month, and the possibility for a lower rate or reduced term, consolidation is an attractive option for many graduates. And, if you already have a consolidation loan, you might consider refinancing if you can find a loan with a lower interest rate.

How Much Will I Pay for My Loan?

A number of variables will affect your monthly payments and the overall cost of your loan, including interest rates and length of time you take to pay off your loan (loan term). Depending on market conditions and your credit score, you may be able to lower your interest rate. When interest rates are low, switching from a variable-rate loan to a fixed-rate loan could save you money over the long term by locking you into a favorable low rate that won't increase as interest rates rise. A shorter loan term can also save you money by reducing the number of payments and the amount of interest you pay over the life of the loan. However, keep in mind that the shorter the loan term is, the larger the monthly payments are. In contrast, a longer loan term will reduce your monthly payment, but increase the total cost of the loan.

For example, if you have a $20,000 loan, a 3.90% APR (annual percentage rate) and a 15-year term, you would make 180 monthly payments of $146.94 to repay the loan, making the total cost of the loan, including interest, around $26,449.The same $20,000 loan with a 3.90% APR and a 5-year term would increase your monthly payment to $367.43, but because you’re paying less in interest over the life of the loan, the total loan cost would be $22,046.

If you need a low monthly payment, the former, longer loan term might make more sense. However, if you can manage a higher monthly payment, you’ll save more money. Note that loans with longer terms generally have higher interest rates.

How Loan Terms Affect Overall Cost

In another scenario, here is how different loan terms would affect the monthly payments and overall cost of a $30,000 loan:

Loan Term Interest Rate Monthly Payment Total $ of Loan with Interest
5 years (60 months) 2.89% $537.60 $32,256
10 years (120 months) 3.55% $297.36 $35,683
15 years (180 months) 4.00% $221.91 $39,943

How Can I Get Started? 

If you’re considering consolidation of your student loans, explore Navy Federal Credit Union’s Student Consolidation Loans with 5-, 10- and 15-year terms and a 0.25% interest rate reduction when you sign up for automatic payments.