Student Loan ConsolidationYou worked hard. You studied late nights and spent hours in the library doing research. You took some grueling exams. Now you’re finally through with college and out in the working world. Everything’s going great, but your monthly student loan payment is huge! It cuts into your entertainment budget. You can’t even afford to go out to a nice dinner or take a trip. You sure as heck can’t save a down payment for a house, and you’re still throwing your money away renting that little apartment. What can you do? There’s got to be a way to improve your situation.There may be a way to improve it. You may be able to save a substantial amount of your hard earned salary every month by consolidating your student loans. Then again, this may not be the right choice for you. “Great!”, you say, “I could really use a way to save some money every month.” If you’re like most people however, you know little about loan consolidation, student or otherwise.Student loan consolidation is a bit different from consolidating your high interest credit card or auto loans. You don’t need to own a home or other real estate to use for collateral for one thing. Your student loans are different from most other loans, they are guaranteed by the federal government. There are two main types of student loans.In one program, the Federal Family Education Loan Program (FELP), students receive money through guaranteed bank loans. This student loan program has been around since the 1960’s and many students have taken advantage of it to finance their education. With FELP loans, the lenders are banks or other financial institutions, who loan money to the student. These institutions make a profit from the interest on the loan, while at the same time being protected against loan default by a federal government guarantee.With a newer program, 1993’s Federal Direct Loan Program, the money is loaned to student directly through the federal government. This is more affordable for the taxpayer because the federal government is collecting the interest and using it to help underwrite the loan program. The loans are actually provided to students by various companies under direct government contract.The interest rates for both types of loans are fixed and the individual school decides which type of program, FELP or Fixed, they will offer. The FELP is more common, as it allows more services to be provided directly by the lending institution to assist students with their loans. There are possible changes brewing. Rep. George Miller, D-Calif, directed the GAO to investigate ways for the federal government to save money in the student loan program. The GAO’s report indicated that the government could save substantial money, possibly as much as $3B a year, by using the Direct student loan program exclusively.Even if changes are made, you will still be able to consolidate your student loans. Why would you want to? You can save substantial money, that’s why. Consolidating all you student loans allows you to lock in lower interest rates on all your loans. The interest rate is adjusted each year, and remains fixed for the year. For the 2006 fiscal year (this year) it is at 4.7% for student currently attending school. This is set to increase to 6.8% for fiscal year 2007. This rate increase goes into effect on July 1 2006. PLUS loans will increase from 6.1% to 8.5%. Needless to say, this is a substantial interest rate increase. Avoiding it will save you hundreds of dollars each month.As an example, if you are currently in school and have $45,000 in outstanding debt at the current rates, you are paying about $471/month. If you consolidate, you could reduce this payment to only about $300/month. There is an incentive to consolidate now, if you can benefit from student loan consolidation. Because of a consolidation deadline, each year there is a rush to get the proper paperwork filed by the due date. Typically congress allows a grace period, so if you have filed the paperwork, but it has not been processed, you still receive your consolidation loan at the existing interest rate.This year, because of the 2005 Budget Reconciliation Act, you may not get to enjoy the grace period. There is a strong chance that if you don’t have the completed loan in hand by the deadline, it will just be too bad. You will still get your loan, but have to pay the increased interest rate from 2007. To illustrate how this can affect you, take our $45,000 example above. Rather than enjoying the $300/month payment, you could find yourself paying almost $350/month!You need to act now! Student loan consolidating may or may not be the right choice for you, but you need to know. The sooner you determine the correct course of action, the sooner you can get going. If you wait, it may just be too late.
Consolidating student loans is a great opportunity to lower your monthly payments and free up some cash each month. Here are some smart tips we have for you on the process of consolidating student loans:oIf you are in your grace period, it is the best time to consolidate your student loans. You are in the grace period if you have finished school but you are not yet in the repayment period, which usually begins 6 months after your graduation. If you consolidate your student loans during your grace period you can usually qualify for a lower interest rate from the lender.oThe federal government passed a recent law that lets borrowers consolidate their student loans with any eligible FFELP (Federal Family Education Loan Program) lender. This means that you have more lenders to choose from than you did in the past.oThe federal government has set the interest rate on consolidation of federal school loans, and this is part of federal law, so lenders are legally bound and cannot charge you a higher interest rate for any reason. It’s always best for you to get the lowest interest rate you can from the lender that you choose, but interest rates on consolidating student loans that were backed by the federal government are fixed for the life of the loan and can’t be higher than 8.25%. That doesn’t mean that a lender can’t charge you less interest, so it still pays to shop around for the best rate.oIf you have both federal and private student loans, don’t let your lender put them together into one consolidated loan. If you do, you will lose the federal benefits that are part of your federal loans. For instance, the cap on interest charged is at 8.25% now for federal student loans, and you would lose this cap if you consolidated both federal and private loans into the same loan. Deferment and forbearance are options that you can use with federal student loans if you fall upon bad economic times like losing your job to layoff or termination, becoming disabled and unable to work, etc. These are important benefits that you would be wise not to lose. Deferment is when the government allows you to postpone payment of the principal on the loan for a period of time. Depending on the type of loan you have, you may or may not need to repay the interest during deferment. Forbearance is when the government allows you to stop your payments for a period of time, but you still need to pay the interest payments. In both deferment and forbearance, there may be ways for you to add the interest payments onto the back of your loan so that you pay nothing during the period of deferment or forbearance.oThe Higher Education Act was passed for the protection of students taking out loans for educational expenses. It specifically mandates that federal student loan consolidations have to have fixed interest rates, no processing fees or loan fees of any kind, no credit checks for the borrower, no prepayment penalties if the borrower pays off the loan early, and a lower interest rate if the loan is consolidated during the grace period.