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Student Loan Nightmare

Consolidate your loans so you can finally sleep at night

By Michelle Suthard

You may have heard the news recently that the government increased the student loan interest rate 1.93 percentage points for the first time in five years. This may seem like a huge increase, but don't lose sleep over it--rates are still at a 38-year low.

So what does this information mean for you? Now is your chance to consolidate your loans and save!

Types of Loans

First you will need to know about the different types of loans you may have. Let's start with the Federal Perkins Loan. This type of loan is generally granted by your college's financial aid office. Since it's a need-based loan, the university's financial aid office must determine who qualifies for the loan and how much they will receive. Universities only have a limited amount of funds to distribute, however, so these loans are awarded on a very selective basis.

The majority of college students have Federal Stafford Loans instead. This is the most common loan available to both undergraduate and graduate students. If a Stafford Loan is subsidized, the federal government pays your accrued interest while you're in school and during the grace period after graduation. If your Stafford is unsubsidized, however, you'll be footing the entire bill.

Lastly, you may have one or several private education loans. There are a variety of lenders that provide private education loans. Most banks and financial institutions offer private student loans to help supplement the costs that other financial aid resources won't cover.

Consolidating Your Loans

Now that you better understand what kind of loans you have, you're probably wondering what's next. Pay off time! It may sound daunting to have to payback all of those loans, but don't even think about attempting to dodge your bills.

Not paying your loans back will cause your credit rating to plummet. And remember, declaring bankruptcy is not an option. Student loans are immune to bankruptcy. You may also face IRS penalties and possible garnishment of wages if you hold off on payment--so make those monthly payments on time.

So what's a good plan-of-action when beginning to repay your loans? A smart move is to look into consolidating your existing loans now while interest rates are still low.

Consolidation involves refinancing one or more of your student loans. The original balance is paid in full, and a new loan is originated for the combined amount and for a new term--all with a low fixed interest rate. Consolidation loans often reduce the size of your monthly payment by extending the term of your loan beyond the 10-year repayment plan that is standard with federal loans.
Depending on the loan amount, the term of the loan can be extended from 12 to 30 years. The reduced monthly payment may make the loan easier to repay. However, by extending the term of a loan the total amount of interest paid is increased. You can always make more than the minimum payment each month to cut the repayment period down and reduce the amount of interest paid.

Get a Head Start

For those of you that haven't graduated yet, there's something new this year. Under a new interpretation of the rules, students don't have to wait until they graduate to consolidate. Students still in school can consolidate existing loans. If you subsequently take on more student loans, then you can consolidate those loans either separately from the initial low-rate consolidation, or as part of a blended package. If you've just graduated and are in your six month grace period, you can get an extra one-half of one percent cut off the consolidation rate if you consolidate within the first six months after graduation. And by consolidating during the grace period, you may also be able to retain the entire grace period. If the lender delays disbursing the consolidation loan until the end of the grace period, you get the benefit of the grace period and are also able to lock in current interest rates. Not too shabby!

Which loans should you consolidate? You can consolidate Perkins, Stafford and PLUS loans (parent loans for students) and even some previously consolidated loans. Unfortunately, you cannot consolidate private loans that are not federally guaranteed. Also, most lenders will only consolidate loans for students with loan balances of at least $7,500. For most of you, this threshold won't be a problem. According to a recent Nellie Mae study, the average student upon graduation owes an average of $18,900 in student loans.

Benefits of Consolidating

What are the benefits of consolidating your loans? The main benefit of consolidation is that it allows you to lock in a low fixed interest rate for the life of the loan. Understand though, that not everyone gets the lowest rate on consolidation. While some can lock in a very low rate close to 3.5%, others may pay slightly more depending on the original loan rates. So check with your lenders (or one of the Web sites listed on page 34) for information on how much your rate will decrease. Each Web site has online calculators, and you can even apply for a consolidation loan online. Note also that there is no fee for you, the borrower, to consolidate.

Another benefit to consolidation is that now you only have to make one monthly payment and to only one lender-saving you a headache each month from sorting out to whom and what you owe. There are also added bonuses, for instance, many lenders offer interest rate and payment reductions if you pay on time over a period of months and/or have your monthly payments automatically withdrawn from your checking or savings account.

Check out the Web sites, do a little homework and in the end you'll save yourself a nice sum of cash for consolidating your loans. Start the process now, so you can relax, get some sleep and focus on what's really important, your first real job!

Online Info

Check out these helpful Web sites for online calculators to help you find out how much your interest rate will decrease. You can also apply for a consolidation loan online.


Michelle Suthard is a Certified Public Accountant working for an asset management firm in Chicago.

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