Calculating A Consolidated Loan

In this article, we provide you with an example of how to calculate your consolidated loan. For an explanation of what debt consolidation is please click here. There are three figures you will need for each loan:

  1. the principal balance (how much money you owe);
  2. the number of periods (how many months) remaining; and
  3. the interest rate.

The following is a hypothetical example. Let’s assume a physical therapist recently graduated with her doctorate. Her loan details are below:

Undergrad student loan:

  • Loan amount outstanding (how much money you owe) = $30,000
  • Months remaining = 120 (10 years)
  • Interest rate = 4.0%
  • Monthly payment = $303.74
  • cumulative payment (this is the overall payments if you paid the loan over 120 months with no prepayment) = $36,448.25

Graduate student loan:

  • Loan amount outstanding = $70,000
  • Months remaining = 120 (10 years)
  • Interest rate = 7.9%
  • Monthly payment = $845.60
  • Cumulative payment = $101,471.86

In this example of debt consolidation, I assume the graduate is going to consolidate her loans into a single 20 year loan. Our new calculations would change to the following:

Undergrad loan:

  • Loan amount = $30,000
  • Months remaining = 240 (20 years)
  • Interest rate = 4.0%
  • Monthly payment = $181.79
  • Cumulative payment = $43,630.58

Graduate student loan:

  • Loan amount outstanding = $70,000
  • Months remaining =240 (20 years)
  • Interest rate = 7.9%
  • Monthly payment = $581.16
  • Cumulative payment = $139,478.18

Comparison Between the consolidated loan and Doing Nothing

Scenario 1 (Doing Nothing)

  • Combined monthly payment = $1,149.34
  • Cumulative payment = $137,920.11

Scenario 2 (Debt Consolidation)

  • Combined monthly payment = $762.95
  • Cumulative payment = $183,108.76

The Good and The Bad

The above example highlights the reason why many people suggest debt consolidation. That is, the monthly payment decreases, making the loans more “affordable” on a monthly basis. That sounds great but you will quickly notice that the cumulative payment is approximately $45,000 more after consolidating compared to not consolidating.

So what should you do? That is a question that can only be answered on an individual basis. In my article entitled Consolidate Student Loans, Is It for Me? I explore this topic further. As always, your friends most likely have the same questions you do. Please share this article with them.

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