All About The Student Loans

You filed your last term paper. Pulled your last all-nighter. And as you enter the proverbial real world with college degree in hand, you reflect with pride on your academic achievement and embrace with newfound confidence the personal and professional challenges that lie ahead.

A little advice? Don't close the book on campus life just yet. Your biggest test is yet to come.
As the estimated 2.8 million college graduates descend upon the job market this year, most face the daunting task of repaying tens of thousands of dollars in student loans. Many have no idea how much they actually owe or to whom payments should be directed, leaving even the most well-intentioned borrowers more vulnerable to delinquency and default.

"The first year of repayment is tough, because that's when recent grads are moving from job to job, they're not being paid as much as they hope to be down the road, and they're physically moving (into homes or apartments), so just keeping track of their loan paperwork can be difficult," says Robert Shireman, executive director of the nonprofit Project on Student Debt in Washington, D.C., and Berkeley, Calif.

It's hard to blame them. With college tuition costs soaring faster than the rate of inflation -- 7 percent a year, according to the College Board -- many degree seekers are forced to finance their educations with a hodgepodge of federal loans, personal loans and supplementary cash from the "Bank of Mom and Dad."

Student loan packages often include both subsidized and unsubsidized Stafford Loans, PLUS loans and private education loans to cover additional living expenses -- all of which offer different terms, interest rates and repayment schedules. Those with exceptional financial need may also have subsidized Perkins loans tossed into the mix.
The National Center for Education Statistics reports some 66 percent of graduating seniors financed their undergraduate education using loans in 2003-2004, the most recent school year for which data are available. Their average cumulative debt that year was $19,202, up from $13,171 in 1995-1996. And that doesn't include any credit card debt they may have accumulated.

Time to consolidate student loans
On July 1, new student loan rates go into effect. The variable rate on Stafford loans converts to a fixed 6.8 percent for loans issued after June 30; the rates convert to a fixed 8.5 percent for new PLUS loans issued to parents of undergrads after that date.- advertisement -
Stafford loans issued before July 1, 2006 will continue to have a variable interest rate that is reset each July 1, based on the 91-day Treasury bill. If the out-of-school Stafford variable interest rate were reset today, it would be 6.86 percent, but many expect it will climb to as high as 7 percent.

That means student and parent borrowers looking to lock in existing loans at today's low rates had better act soon.

Consolidation loans allow borrowers to group together multiple variable-rate federal student or parent loans at a single fixed rate. That rate is determined by taking the weighted average of the interest rates of your original student loans and rounding up to the nearest one-eighth percent.
Borrowers with a Stafford loan already in repayment are eligible to lock in a consolidation loan at 5.3 percent before the July 1 deadline. Borrowers still in school or in their grace period can claim the lower 4.7 percent rate, but only by first requesting that their loans be put into repayment status by the lender. While the student can request deferment to delay payments until after graduation, the grace period will disappear.

"This is the last hurrah for in-school borrowers," says Eric Solomon, a spokesman for education finance company Nelnet, in Lincoln, Neb.
Those who consolidate over the next few weeks stand to save big. According to Nelnet, student loan borrowers in their grace period or in-school deferment with a $20,000 balance and 20-year consolidation term can save almost $5,123 in interest over the life of their loan by filing a consolidation application before July 1. By taking advantage of the lower rate, they would also reduce their monthly payment by $22.

Loan consolidation is one way to help manage your debt and potentially lower your payments.
Once you consolidate, you can send your new lender one monthly payment. The standard 10-year repayment period can be stretched out anywhere from 12 to 30 years, which helps lower your monthly payments, but also adds to the overall interest you'll pay.
Borrowers who can afford to make their payments without stretching the term should do so, says Robert Shireman, executive director of the nonprofit Project on Student Debt in Washington, D.C., and Berkeley, Calif.
"Alternative payment plans that prevent borrowers from going into default are a good thing, but in many situations borrowers end up paying much more in total interest over a longer period of time," he says. "It's not necessarily a gift from the lender."

One final word of warning: If you hope to qualify for student loan forgiveness by pursuing certain public service careers, do not consolidate your Perkins loan. Only the portion of your Perkins loan that remains unconsolidated is eligible for forgiveness. Senior year, undergraduate students carried an average outstanding credit card balance of $2,864 in 2004, according to Nellie Mae, a subsidiary of Sallie Mae, which provides both federal and private education loans.
"For many, student loans are a first borrowing experience, so it's all about understanding your rights and responsibilities," says Martha Holler, a spokeswoman for Sallie Mae. "When you graduate, you may not remember what your mixture of loans is."

Organization is keyThe first step to managing student debt is to get your ducks in a row.
That means pulling together all documents received from lenders, including application forms, promissory notes, disbursement and disclosure statements, and repayment schedules. It's also wise to keep copies of all correspondence between you and your lender and your financial aid office.
If you haven't done so already, start a filing system now to help organize your paperwork, which you should plan to keep until well after your student loans have been repaid.

Student loan forgiveness programs
Admit it, you're hoping a long-lost rich uncle steps in to make your student loans disappear.
Never hurts to dream, of course, but your time may be better spent exploring what many in the industry call the next best thing -- student loan forgiveness programs. A number of organizations, both private and public, offer college graduates a chance to reduce or eliminate their student debt in exchange for years of service.
"I imagine there are a large number of people who don't know these programs exist," said Kalman Chany, president of New York-based Campus Consultants and co-author of "Paying for College Without Going Broke." "I wouldn't let loan forgiveness dictate your career path, but if you qualify it may be something you want to look into."

The military, for one, offers loan payback programs for those who enlist in the Army, Navy or Air Force after college. For each year of active duty, the service branch makes a payment of 33½ percent or $1,500, whichever is greater, on your total remaining principal balance. The Army and Navy will repay up to $65,000 in student loans. The military's Web site offers information on student loan repayment programs.

Voluntary service in the Peace Corps and AmeriCorps can also help chip away at your debt burden, while providing countless social rewards.
For its part, the Peace Corps allows volunteers to reduce their outstanding balance on Perkins loans by up to 15 percent for each year of service. It also offers deferment of Stafford, Perkins, Direct and consolidation loans. AmeriCorps, the domestic arm of the Peace Corps, offers up to $4,725 in education awards for each term of service, along with modest living expenses.
Teaching in an underserved school system, meanwhile, could eliminate your loans altogether. Details are available at the Department of Education's Web site.

Lawyers can also get help. Law schools provide loan repayment programs to graduates who serve in the public interest or work for nonprofit groups. The National Association for Public Interest Law has more information on its Web site.
Same goes for doctors who agree to practice in communities where health professionals are few and far between. The National Health Service Corps, under the Department of Education, will pay up to $50,000 for two years of service, based on the participant's outstanding loan balance.

A quick search on fedmoney.org, a free Web site of all government grants and loan programs, provides a laundry list of other employers offering similar loan forgiveness incentives -- just in case that rich uncle never shows up.
source from : bankrate.com