10 things every student loan borrower needs to know
What's happening with student loan rates?
The interest rate on Stafford loans increased for the first time
in five years, on July 1, 2005. This is the country's main source
of student loan funds. These loans were at record low rates last
year -- 3.37 percent. Graduates who acted quickly were able to lock
in that low rate, by consolidating their student loans by June 30,
2005. The rate is now 5.3 percent for students repaying their student
loans. That rock-bottom interest rate only applied to Stafford loans
disbursed after July 1, 1998.
What is a federal consolidation loan?
With a federal consolidation loan, your lender pays off the balances
of all the loans you choose to consolidate and then issues you a
new loan. A consolidation loan may lower your monthly loan payments
by as much as 50 percent and it can also lengthen your repayment
How do you calculate the interest rate on a consolidation
The interest rate on a federal consolidation loan is determined
by taking the weighted average of interest rates on the federal
education loans you have and rounding up to the nearest one-eighth
of a percentage point, capped at 8.25 percent. The interest rate
varies from borrower to borrower, but averages from 2.875 percent
to 4.25 percent.
Is a consolidation loan right for me? How much
money can I save?
Find out by contacting your student loan lenders. Ask plenty of
questions and be as specific as possible. The aim is to find out
how your particular mix of student loans might be consolidated.
Not sure what lender is handling your student loans? The National
Student Clearinghouse has a free, loan
locator service on its Web site.
Where can I find out more about consolidation loans?
Information, applications and calculators for consolidation loans
are available on the Sallie
Funding Services, and College
Loan Corporation and NelNet
Web sites. Information on consolidation loans from the U.S. government
is available on the U.S.
Department of Education Web site.
How can I get a discount on a consolidation loan?
Some lenders will reduce the interest rate on a consolidation loan
by a quarter percent when you sign up to have your monthly loan
payment debited from a checking or savings account. A lender may
also knock down your interest rate by 1 percent after you make 48
consecutive, on-time payments. Be sure to ask about discounts when
shopping for a consolidation loan.
Should I consolidate now, or wait?
The rock-bottom interest rates on federal student loans were in
effect only through June 30, 2005. But anyone with a heap of student
loan debt may still want to check out a federal consolidation loan
if they're interested in making their monthly payments more manageable.
Smaller payments when you're just getting started in your career
might help to keep your budget from getting squeezed too tight.
Remember that after grads leave school, there's a six-month grace
period before their loan payments begin.
I consolidated once before; can I do it again?
No. Once you consolidate your loans there's no going back. You're
stuck paying the rate you locked in on your old consolidation loan.
The only exception would be if you decide to go back to school and
take out additional loans. You'd then have the option of combining
your new loans and your old consolidation loan into a brand-new
I'm still in school, how can I cash in on lower
interest rates on student loans?
You already are. The rate on Stafford loans for borrowers that are
still in school (or in grace) is 4.70 percent as of July 2005 and
will stay there through June 30, 2006. Students with unsubsidized
Stafford loans will pay less interest in the 2005-2006 school year
and owe less money upon graduation. Students with subsidized Stafford
loans do not pay interest on loans while they're in school.
Follow these steps to consolidate
Technically, obtaining a consolidation while
still in school is a multi-step process, says Martha Holler, spokeswoman
for student loan provider Sallie Mae. But loan providers often handle
all or most of the steps as one transaction. And under the new reading
of the rules, students can start the process with a phone call,
says Holler. It used to require written notification.
Holler explains how it works:
First, the student asks to repay the loan. Reason: Unless the loan
is in "repayment" status, it doesn't qualify for consolidation.
Next, the student asks for a deferment until graduation, which is
automatically extended if the student is in school more than halftime.
Then, the student applies for consolidation. Last, she signs a promissory
note to repay the loan starting immediately after graduation, she
Just how late students can submit
applications for consolidation depends a lot on the lender and the
complexity of their applications. Some lenders, such Sallie Mae,
have Web sites that allow students to complete and submit applications