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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 period.

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How do you calculate the interest rate on a consolidation loan?
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 Mae, Collegiate 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 consolidation loan.

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 says.

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 online.

-- Updated: July 13, 2005

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