Graduating from college is the easy bit. It’s “growing up” that’s difficult, especially when a freshly-minted graduate realizes that she’s taking her first step into full blown independent adulthood with on average $20,000 of student loan debt hanging off her neck.Student Loan “Grace Period” 6 Months After Graduation. Cleaning up after graduation parties and removing end-of-senior-year mind cobwebs reveals that each new graduate has a Federally mandated 6 month grace period in order to pay down the total student loan obligation…or to refinance the debt via a 1-time student loan consolidation.Consolidating Student Loans. Student loan consolidation involves some simple, but important rules. Only graduates can consolidate. Current students are barred from consolidating student loans.* Student Loan Consolidation Rule #1. Identify 100% of your outstanding college student loans. Why 100%? The Government only permits a 1-time student loan consolidation. Forget to include a past borrowing and you get nailed. The National Student Loan Data System manages a database where your loan history should be recorded.* Student Loan Consolidation Rule #2. Time matters. Consolidating student loans must result in your application being received on or before 30 June if you want to avoid potential interest rate increases.* Student Loan Consolidation Rule #3. Freshly graduated students are provided a 6-month grace period following graduation. Identify, say, your total Stafford student loan portfolio and then consolidate student loans in one fell swoop…and you’ll receive an instant 0.6% interest rate reduction on the balance. This discount could become serious money savings over time.* Doing The Math. Student loan consolidation is based on math…taking weighted averages of all past borrowings, then rounding up 1/8th percent to result in your consolidated student loan interest rate. All of this consolidation occurs prior to 30 June in the year that you apply.Where Are The Lowest Cost Student Loans? Thank you Big Government…the best student loans rates you’ll get are Federally issued Stafford, Perkins or PLUS student loans. Government-backed, these Stafford and related student loan borrowing plans offer lower interest rates than private market lenders can offer, along with more flexible loan repayment terms. Why? Unlike a personal loan, the Federal student loan transfers a portion of the borrower’s risk to the Government…resulting in lower-cost-of-funds.Are Personal Background Credit Checks Always Required? No. Not every student, or her parents, necessarily has the cash or good credit history to satisfy student loan lenders. The good news is that “No child left behind” and the American commitment towards higher education…enters into a marriage of convenience with profit-seeking lenders…to create a secondary market in bad credit student loans. Risk adjusted, bad credit student loans carry marginally higher interest expenses, are generally more inflexible regarding payment lapses, yet offer longer repayment terms which lowers the monthly out-of-pocket expense. Meanwhile Federal Stafford or Perkins loans are ‘credit neutral’ and do not require a credit background check in order for a student and his family to qualify.Federal Student Loans Versus Private Loan Sources – Pros & Cons. Historically, Federal PLUS, Perkins or Stafford student loans offered the most flexibility and, due to government backing, the lowest interest and repayment rates. Until 2006 Federal loans could be “variable”… where the next year’s interest rate is based on the Treasury market in a 90 plus trading period ending 1 June. The new “variable rate” becomes effective 1 July each year for all past variable rate loans. For example, 2006 Federal student loan rates for variable carried a 6.54% interest cost.* Congress Passes New “Fixed” Rate Student Loan. Because of new legislation passed by Congress, all “new” Federal Stafford loans from 1 July, 2006 onwards are now “fixed” at 6.8%.Fine Print – What’s The True Discount Student Loan? College student loan “deals” require a mix of focus and document review in order to decipher the true nature of “discounts”. As Albert Einstein opined “God dwells amongst the details” and so it applies to student loan documents.* Practical Example. For example, “discounts for on-time payments” may look attractive…but what if the interest rate deduction “reward” only occurs retroactively after 4 to 5 years? One missed payment anywhere in the time-stream and presto…the discount vanishes. Or, certain discounts only apply to portions of the loan term…in other words, you’ll pay “full rate” for substantially all of the loan life, and the discount only applies to a portion of the loan life. Result? An advertised 1.25% “discount” may actually be worth only .25% when you move through the discount analysis. A useful site for families interested in the “fine print” cost of student loans is www.finaid.org.
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