How to shop student consolidation loans -- Page 2

How long has the company been consolidating student loans? Do they have a track record? Do you know people who have used them, and what were their experiences? (For a list of top consolidating lenders for 2003 and 2004, visit the Department of Education's Federal Student Aid Web site.)

Another important factor: Can you apply via Internet? "It's one of the things they want to look for at this point: the ability to complete an application online," says Ann Collier, senior vice president of corporate and marketing communications for Collegiate Funding Services Inc.

Some companies, such as Sallie Mae, also have programs to walk the student through the whole process.

Shopping smart
You might have this loan for up to 30 years, so it pays to look at all of the angles.

The standard interest rate will be the same everywhere. But lenders often offer perks, varying repayment plans, and other options to differentiate themselves.

Ask what the lender is offering. Sometimes called "borrower benefits," the menu could include lowering the rate or forgiving a percentage of the debt after a certain number of on-time payments or for using electronic payments.

Different lenders also offer different repayment options. Ask what happens if you want to stretch out the terms of your loan a few years from now. Is it possible in this program? Would you still get the low, locked-in rate? What if you want to shrink the terms of your loan and pay it off early?

Does the company offer other repayment options? If so, how would those work?

One example: Sallie Mae offers an income-sensitive option where the repayment schedule is tied to your income, says Korsvall. Another program lets borrowers repay interest only for the first two or four years.

When is the first payment due? If you're still in school, you can ask for a deferment so that you don't actually have to begin making payments until you leave school. But in some cases, you lose the six-month payment-free grace period after graduation.

So you should ask: Will you lose your grace period? Or is the lender willing to honor it? Will interest continue to accrue? At what rate?

Since it's common for graduate and undergraduate students to have a gap between graduation and that first job, the idea of a grace period is often important, says Ken Lafler, director of financial aid, Harvard Law School.

If you know you're not going to be able to make payments right after graduation, but want to lock in those low rates, ask about a forbearance, says Lafler. Under what situations will the lender give you a temporary break from payments? If it's an option, what's the trade-off? For instance, you might have to forfeit the opportunity of getting a rate cut for timely payments.

Whatever answers you get, make sure they are supported by language in the contract. Nothing counts unless it's in writing.

Have the rep calculate exactly how much that first payment will be. "Then reality sets in," says Janet Sain, president of the Southern Association of Student Financial Aid Administrators.

If the payments will change, by how much and when? They will change, for instance, if you take an interest-only option for two or four years.

And what day is the payment due every month? What is considered "late"? Since some lenders knock down the interest as a reward for timely payments, this can be important. And are there penalties for late or missed payments?

What will this consolidation cost you over the life of the loan? Have the lender calculate that for you, says Sain. "Is the lender willing to do the comparison for them?" Compare it to what other offers might cost you.

And if you're a married couple, don't consolidate loans together. If your spouse dies (now or in the next 30 years), "you would be responsible for that debt," says Howard Thomas, president of the Midwest Association of Student Financial Aid Administrators. Likewise, in a divorce, you could end up paying your spouse's school bills.

Since you are, in essence, starting a long-term relationship with the company, look for features that will make your life easier, such as easy online access. "You want to pick a lender who offers a variety of services," says Korsvall.

And listen to your gut. Is the lender's rep answering your questions or glossing over your concerns?

How responsive is the company? You don't want your paperwork to languish on someone's desk.

How well do they seem to understand the process? If you're still in school and have a loan with one lender but are consolidating with another, you have to ask your first lender to put the loan into repayment status. Does your rep understand all the steps; how will you be notified if there is a glitch?

"You want to make sure you have a dialogue with the person with whom they are consolidating, so they do this correctly," says Collier.

When you follow up with the company, can you get answers or is it hurry-up-and-wait? If you call, do you get a real person or a lot of hold music and voice mail?

Does the company service its own loans or do they sell off a good number of them? "I want to know who's going to eventually hold this paper," says Harris-Small.

Selling them isn't bad, but you want to find out -- in writing -- if you get to keep your borrower benefits if the loan is sold. Ask the rep, and also talk to other students who consolidated with the company, says Sain.

Overall, getting a good deal just comes down to knowing what you want and doing a little fact checking.

"I've been doing this 30 years and have found that students understand it a lot better," says Harris-Small. Partly because of the refinancing boom, students are familiar with a lot of the concepts they need to know to make intelligent loan choices, she says. "Talking about finance is something they're hearing at the dinner table."

Dana Dratch is a freelance writer based in Atlanta.