| Q | Where do loans come from, anyway?
| | Stafford and PLUS loans are issued through one of two federally approved programs -- the Federal Direct Loan program and the Federal Family Education Loan, or FFEL, program. Colleges and universities determine the program they participate in.
What's the difference? Loans issued from the Federal Direct Loan program come directly from the government. FFEL loans originate from third-party lenders who participate in the federal program. While the federal government sets the ceiling on rates for both programs, the terms can vary for students who take out loans through the FFEL program, which are much more common.
|
| Q | How can the terms vary with FFEL loans?
| | For instance, FFEL loans have a 1 percent default-aversion fee, and while some lenders absorb the cost, others pass it on to the borrower. The same goes with origination fees, which will be phased out by 2010: Some lenders are paying them, but some are not. These details may be buried in loan documents, so ask upfront: What fees will I be responsible for paying? On a happy note, lenders can offer consolidation loans at rates that are lower than those set by the government, but few are doing so.
|
| Q | So, what are my choices?
| | First determine which program your loans come from. If it's the Direct Loan program, find out about consolidation at the federal government's Web site,
www.loanconsolidation.ed.gov.
If it's from the FFEL program, you don't have any restrictions. It used to be that if all your loans came from the same lender, you had to apply for consolidation only through that lender. Congress removed that restriction in mid-June. That means you can consolidate at any participating lender. Just look for the best deal. |
| Q | What incentives should I pay attention to?
| | Many lenders in the federal loan program offer a rate discount (typically 0.25 percent off the rate) if you allow payments to be automatically deducted from your savings or checking account. Many also offer a 1 percentage point reduction off the interest rate to borrowers who make payments on time for an extended period -- at least a year, but more commonly two or three years. However, most lenders will rescind the rate reduction, even after the lengthy probationary period, if the borrower makes one late payment. However, some lenders are more lenient. So it pays to shop around. By the way, the Federal Direct Loan program offers a 1.5 percent rebate of the principal loan balance to students who pay on time. |
| Q | Should I mix all my loans into one?
| | Don't add Perkins loans to the mix. They already come with a low fixed rate of 5 percent, plus these loans are eligible for
loan forgiveness to students who pursue certain public-service professions such as teaching or health care.
Often the rather stringent limits on Stafford loan amounts cause students to borrow money from private lenders. While public and private loans can't be combined, if you have multiple private loans, you can consolidate those, too. But since the rates they charge are independent of the rate caps imposed by the federal government, there's no reason to rush into this before July 1.
|
| replacecontent-tcm:8-23713