Tuesday, August 5, 2008

College Loans

Mellody Hobson: Student Loan Consolidation
For Graduates Paying Back Student Loans, Condolidation Is a MustThe June 30 deadline for college graduates, parents and students to consolidate their student loans to avoid rate increases is just two weeks away, and it's time to take advantage of consolidation if you haven't done so already.
Mellody Hobson, president of Ariel Capital Management in Chicago, is ABC News' contributing editor. (ABC News)Loan consolidation refers to combining multiple educational loans into a single, larger loan that a student pays off each month. According to FinAid, two-thirds of undergraduate students graduate with some debt, and the average federal loan totals nearly $20,000 per student.

What rate increases will take effect as of July 1?
Rates on existing Stafford and PLUS loans (Parent Loans for Undergraduate Students) are variable and change annually on July 1. This year rates will rise a considerable 1.84 percent. Specifically:
Rates on Stafford loans for current students or those in the deferment or grace periods (you have a six-month grace period after leaving school before you enter repayment) will rise from 4.7 percent to 6.54 percent. Rates on Stafford loans currently in repayment will rise from 5.3 percent to 7.14 percent. Rates on PLUS loans will rise from 6.1 percent to 7.94 percent.
While these rates have jumped significantly over the past few years, they can only go so high . By law, Stafford loans are capped at 8.25 percent, while PLUS loans are capped at 9 percent.

What does this mean in real dollars for current students or 2006 graduates?
If you are a student or recent graduate with a $20,000 Stafford loan and you consolidate before June 30, you will lock in at a rate of 4.75 percent, which represents a weighted average of the rate of the loan (or loans) being consolidated, rounded up to the nearest one-eighth of a percentage point. At this rate, you will pay about $129 a month and $11,019 in interest over 20 years.
However, if you choose to consolidate your $20,000 loan after June 30, you will likely pay 6.625 percent, increasing your monthly payment to about $150 and your total interest paid to $16,142, meaning you will pay an additional $5,123 over the life of your loan.

Are there any changes to the rules that current or future students should be aware of?
Since the late 1990s, Stafford and PLUS loans have had variable rates that move up or down each year on July 1, with rates based on the three-month Treasury bill yield at the end of May. But the rules for these loans have recently changed. Rather than variable rates, new Stafford loans issued after June 30, 2006, will be fixed at 6.8 percent, while new PLUS loans will be fixed at 8.5 percent. Another important change to the rules affects current students. After June 30, students can no longer consolidate Stafford loans while they are still in school, so consider taking action now.

What is the first step to consolidation?
Before you consolidate, you must take inventory of all your outstanding loans. The best way to do this is to log on to the National Student Clearinghouse Web site (www.nslc.org). You can consolidate your loans at a bank or credit union that is a member of the Federal Family Education Loan Program. Alternatively, you can go directly to the U.S. Department of Education (www.loanconsolidation.ed.gov) or call 800-557-7392. Remember, if all your loans are held with one private sector lender (rather than through the federal government or the direct-loan program), you must give that lender the first right of refusal on the chance to consolidate your loans before shopping around to other lenders.
You should not respond to a phone solicitor who calls you to consolidate your loans. Keep in mind, there are never any fees associated with consolidation, so if the lender requires you to pay an application or credit check fee, find another lender.

What are the rules of consolidation?
Most federal loans can be consolidated. Students can consolidate while still in school, during the six-month grace period immediately following graduation or during the repayment period. Keep in mind that interest rates are lower when you consolidate while you are still in school or during your grace period.
To qualify while still in school, a student needs to request early repayment status from the lender. By doing so, you lock in the lower rate but also wipe out your future grace period. However, students can still defer payments by requesting an in-school deferment until after graduation.

Here are a few stipulations to keep in mind:
You can only consolidate once. It is not like refinancing a mortgage where you can keep locking in lower rates. Second, lenders typically require a loan balance of at least $7,500. Additionally, the onus is on the student to identify a lender willing to consolidate loans. Because the clock is ticking, you may want to get a list of preferred lenders from your alma mater or check out www.finaid.com, a Web site that provides a list of lenders offering federal and private loans, including consolidation loans.

Are there other advantages to consolidating?
Not only will consolidating allow you to lock in the lowest rate in history, it also opens the door to other savings opportunities. For example, if you enroll in an automatic debit plan, you could decrease your interest rate by another quarter-point.
Additionally, after 36 months of on-time payments, some lenders will slash your interest payment by up to another whole percentage point. Finally, consolidation loans do not carry any prepayment penalties -- so go ahead and pay more toward your debt -- just be sure to write "principal payment" on the memo line of your check.
Are there any pitfalls to consolidation? Yes. Although monthly payments are lowered because the life of the loan is extended, keep in mind you could pay considerably more in interest over the life of the longer loan. Additionally, when you consolidate before July 1 you forfeit your six-month grace period, which means after graduation you must start repayment immediately. For many graduates still in the job search, this can be a frightening reality. However, you may qualify for an economic hardship deferment that lets you postpone payments for a period of time. Likewise, consider contacting your lender directly to explore options.

An Extraordinary Dedication to Our Customers.
We know navigating the student loan process can be a harrowing experience at best. But it doesn't have to be. Student Loan Solutions advises and helps students, college graduates and parents secure the student loan they need, from Stafford and PLUS loans to alternative and consolidation loans. We also provide educational materials for school administrators and financial aid officers.
At SLS, you're assigned a personal Educational Loan Counselor who is an expert in the student loan field. They attentively listen to your situation, answer all your questions and carefully explain your different loan options - in terms everyone can understand. And that's important. Because we want you to understand all your choices, so you can make an educated decision. Plus, once you've made your decision, they'll walk you, step-by-step, through the entire loan process.
So whether you have a quick question about an interest rate or want in-depth information about consolidating your student loans, call us today and put our student loan experience to work for you.

Just the Facts
Currently headquartered in Salem, NH, Student Loan Solutions has experienced healthy growth since our inception and are actively researching expansion opportunities in Florida and Arizona.

Eligibility for federal student loan consolidation
You are eligible to consolidate federal student loans when:
You are no longer enrolled in school (defined as being enrolled less than half time) You must be in the "grace period" of the loan or must be actively repaying your loan. Most consolidation companies require a minimum loan amount, $10,000 is typical.
The difference between federal and private student loans
Federal student loans have advantages over private loans. For example, interest on the loan is tax deductable, the loan can sometimes be forgiven for certain types of service, and you can sometimes defer payments on the federal loan if you go back to school.
Private loans don't have these advantages - they are really just loans either secured or unsecured, and you have to pay them back just like any other loan.
So, it's important to not consolidate federal and private loans together. Consolidate all your federal student loans first, then separately consolidate your private loans. If you were to mix the public and private loans you would have to take out a single private loan that loses all the benefits of the federal loans. Keep government student loan consolidation separate from private loan consolidation.

Student loan debt
About 50% of recent college graduates took out student loans, with an average borrowed around $10,000 (ref. 3). In the last three years, rates have fallen very low. As of fall 2003, Stafford loan interest rates were in 3-4% range (ref. 2). Consolidation interest rates can be much lower (under 2%), but this comes with very specific requirements - like good repayment history.
Like any debt, student loans can influence your credit and your future decisions. Students who borrowed a substantial amount for college (more than $5000) are less likely to pursue higher education (ref. 3). In addition, student loan debt that exceeds 8% of your income can be seen negatively when your credit gets assessed for future loans.
Two ways to reduce the debt burden are: 1) reduce or eliminate the principal balance. Specific types of loans can sometimes be forgiven by service or other higher education - look into the specific student loan program you have. 2) Reduce your monthly payment. Since debt burden is measured by comparing your loan payment to your income, reducing your payment helps your credit evaluation.

References and Links
School loan consolidation - Information on eligibility and rationale for consolidating (or not consolidating) your student loans.1. Federal Student Loan Consolidation Federal Student Loan Consolidation can reduce your student loan debt by fixing and reducing the interest rate on your loans. Consolidating separate loans with a single company simplifies payment and debt management options. 2. Consolidation recommendations of the University of Michigan Law School3. National Center for Education Statistics4. AAMC - financial planning information for pre-meds