Should You Subsidize Your Loans Even at low APR rates? |

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I got mail from one of my banking platforms today, and upon opening it, found a prequalification letter about how I may be eligible for a low rate total student loan consolidation at an APR of 2.99% variable. I knew better than to entertain this sort of offer and I succinctly threw it in the trash, but it had me wondering whether the math stacks up? If the math works out, I may end up picking the piece of letter out of the trash and giving them a try. But if it doesn't, I will continue to dump it further in the trash and give you the scoop on what I think about student loan consolidation. 

My Current Loans:

My student loan consists of 4 different federal loans: two of them are subsidized and two of them are unsubsidized. Each of these loan amounts vary in amount and interest rate, and so the amount of interest that each individual loan type accrues varies per cycle period.

LOAN A: $5,333.06 Subsidized Loan at 4.29%

LOAN B: $7,323.74 Unsubsidized Loan at 4.29%

LOAN C: $399.99 Subsidized Loan at 3.76%

LOAN D:  $3,255.26 Unsubsidized Loan at 3.76%

If you averaged the loan rates together, you would get approximately 4.025% However, the interest might actually end up being lower if you take advantage of federal programs that benefit you during crises. For example one loan program that are only applicable to federal student loans is income-based repayment plans. I enrolled in one of those pre-pandemic and that allowed me to have year-long payment deferral with only my unsubsidized loans accruing interest during those periods. If I were to average the loan rates for the ones that garnered interest during these forbearance periods, it would have been 2.0125% for the year. 

Obviously, I was able to take advantage of the federally mandated covid forbearance in 2020 upon which none of my loans accrued interest. If I were to have consolidated my loan and packaged it into one lump-sum figure at a lower fixed interest rate, I would not be able to access these federal programs. Further, I wouldn't have been able to take advantage of some debt methods such as the avalanche or snowball method, since all of the loans would have been repackaged into one huge loan. This repackaged loan would have to be paid every month, and the flexibility of such payments will be slim to none. 

The Math:

Consolidated Loan AMT of $16,407 at 2.0% fixed interest for 25 years:

Estimated mandatory minimum payment of $89.72 per month

Estimated total interest paid of $10,512

Leaving the Federal Loan As-Is:

LOAN A: $5,333.06 Subsidized Loan at 4.29% for 25 years

-Estimated Min PMT of $50.81 

-Estimated total INT paid of $9,909

LOAN B: $7,323.74 UnSubsidized Loan at 4.29% for 25 years

-Estimated Min PMT of $69.78

-Estimated Total INT Paid of $13,609

LOAN C: $399.99 Subsidized Loan at 3.76% for 25 years

-Estimated Min PMT of $3.37

-Estimated Total INT Paid of $607.01

LOAN D:  $3,255.26 UnSubsidized Loan at 3.76% for 25 years

-Estimated Min PMT of $27.31

-Estimated Total INT Paid of $4,936

Estimated Grand Total:

-Monthly Min PMT of $152 

-Estimated Total INT Paid of $12,654


Loan Consolidation:

The Pros:

The marginal benefit of consolidating your federal student loans into a lump-sum package at a fixed 2% rate is $2,132. This means that the advantage of consolidating at this particular rate would mean an estimated smaller minimum payment per month of just $90 in order to extinguish the loan within 25 years. 

You potentially pay less in minimum payments owed

The Cons

You would have to pay this every single month, and not be late, otherwise there might be some loan terms or provisions that could be to your detriment. 

You wouldn't be able to utilize some neat debt repayment methods such as the Avalanche method or the Snowball method. These can oftentimes create less burnout by allowing you to see smaller loans get extinguished in real time.

There are no federal benefits such as Covid forbearance or income-based repayment plans, among many others, that would otherwise be applicable for current federal student loan payors. 

There is no guarantee that you would be approved for the "pre-qualified" loan rate. Usually, it may be higher, and you might ding your credit score in the short-term with a hard inquiry!

Federal Loans:

The Pros:

The marginal benefit of consolidating your federal student loans into a lump-sum package at a fixed 2% rate is $2,132. This means that the long-term outlook is a negligible benefit were you to repackage your federal loans into a privately packaged one. 

There are federal protections and benefits to current student loan payors such as income-based repayment, and etc. 

You have the ability to pay off a loan amount with either the Avalanche method or the Snowball method

You will have more motivation when a smaller loan gets paid off first, and you lower the overall principal balance in full. 

The Cons

You potentially pay a higher minimum payment due to the cost of loans at different interest rates

Unsubsidized loans still garner interest during income-based repayment plans or other federal programs.


In my opinion, consolidation is good for those that have the ability to pay and are quite confident in their job security. This means that they will be able to meet the minimum payments with no problem; they also have the potential to increase their monthly payments to pay-down their principal debt faster. The downfall of this method is that you will be reliant on your job or other income streams in a down market. As we have just witnessed, too many people who were once solvent, ran out of their emergency funds due to this covid pandemic. Keep this in mind when you decide to make further life choices that cause you to have increasing monthly payment obligations.

Leaving Federally backed student loan programs as-is is a smart move for those that have a lower annual income and don't have job security. Because federal loans are generally packaged into subsets, being able to utilize other debt pay-down methods such as the Avalanche or Snowball method is extremely beneficial mentally. It can also help with lowering overall interest rate and minimum payments in the future. Also, if pandemics or other market downturns were to hit in the future, federal programs exist to help student loan bearers as well. 

Let me know what your opinion is of this article, and what was your experience with student loans like? The comment box is all yours! 

Disclaimer: I'm not a loan, credit, or financial advisor. This is my opinion only.

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