Last Chance To Consolidate Student Loans
Deadline-oriented? If you or your college- or post-college-age child holds one or more Stafford or PLUS federal student loans, little time remains before the June 30 deadline to consolidate your loans and lock in a lower fixed interest rate.
Each summer, the Department of Education adjusts the interest rate on its two most popular variable-rate student loans based on the three-month Treasury bill. This July 1, those loan rates will climb by 1.84 percent, one of the largest increases in the history of the federally guaranteed student loan program.
The rate lowdown
The rates for Stafford loans for enrolled students, or those in the six-month post-graduate grace period prior to beginning repayment, will bump up from 4.7 percent to 6.54 percent. Rates for Stafford loans already in repayment will increase from 5.3 percent to 7.14 percent. Rates for PLUS loans (Parent Loan for Undergraduate Students) will climb from 6.1 percent to 7.94 percent.
New Stafford loans issued beginning July 1, 2006, will carry a fixed rate of 6.8 percent; PLUS loans will be offered at 8.5 percent. After June 30, students will not be able to consolidate Stafford loans while they are still in school. Stafford rates are federally capped at 8.25 percent, PLUS loans at 9 percent.
To avoid this nearly 2-point hit to your loan rate, you must consolidate your Stafford and PLUS loans with either your current lender or another before July 1. Congress repealed, on June 15, the "single holder" rule that previously required you to consolidate with your current lender if they issued all of your loans.
Consolidation combines your loans into a new, fixed-rate loan; the interest rate is calculated as the weighted average of the underlying loans. The savings can be significant. According to leading education lender Sallie Mae, a borrower with a $20,000 loan balance who consolidates and locks in at 4.75 percent by July 1 will lower his monthly payment by $22 (from $151 to $129) and save $5,123 in interest over the life of the loan.
Too good, but true
Financial aid expert Mark Kantrowitz, who publishes the nonprofit FinAid.org Web site, hopes the marketing blitz launched by lenders to capitalize on the deadline doesn't inadvertently deter borrowers from consolidating.
"The problem is not whether you need to consolidate; you definitely do, to lock in the current low rate. The problem is that the marketing of this has perhaps crossed the line where there is too much frenzy going on," he says. "My concern is, the student may receive these mailings and think this has got to be a scam because it sounds too good to be true and will then react by not consolidating and therefore lose out on the opportunity."
Some aggressive loan marketers have carpet-bombed student borrowers in recent months with fear-baiting "Final Notices," as well as alluring offers of instant cash rebates, additional interest discounts for on-time payments, and numerous other incentives, all in an effort to win their consolidation business. Although no fees can be attached to student loan application or consolidation, lenders are able to improve their margins and offer borrowers more attractive monthly payments by extending loan terms to 20 or even 30 years rather than the program standard of 10 years.
Before you make your move, read Kantrowitz's loan-consolidation tips. While the savings opportunity is real, so is the marketing hype that can easily lead you astray.
Degrees with debt
These days, two out of every three undergraduate students (65 percent) go into debt an average of $19,202 to pay for college, according to the 2003-04 National Postsecondary Student Aid Study by the Department of Education's National Center for Education Statistics. With interest rates increasing the past two years, consolidation has become an increasingly attractive alternative. In fiscal year 2005, 2.5 million borrowers consolidated nearly $70 billion in student loans, up from $44 billion in fiscal year 2004.
Every summer, campus financial aid offices are flooded with questions from students like Riley McMinn, whose $40,000 in Stafford loans finally forced him to consolidate last summer.
"I didn't know anything about loans or interest rates or anything like that when I started as a freshman," says McMinn, who graduated with a master's degree in exercise science from the University of Mississippi in 2005.
McMinn acted "the day before (last year's) deadline" and consolidated. It not only dropped his interest rate from 4.87 percent to 2.87 percent and cut his monthly payment nearly in half, from nearly $400 to $230, but if he pays on time for 36 months, he'll shave an additional percentage point off his already low fixed rate.
Now out of school and employed at Baptist Memorial Hospital in Oxford, Miss., McMinn says he's glad he consolidated when rates were low.
"If my loan rate were any higher, I think it would be difficult. Now I try to make double payments when I can because it's such a small amount, and I get a tax deduction on the interest," he says.
'They've been bombarded'
Dewey Knight, associate director of aid at Ole Miss, says his office has put out numerous e-mails to every student cautioning them to ignore the marketing blitz, but by all means consolidate before the deadline. They've even put a consolidation section on their Web site that includes links to a "preferred list" of consolidators.
"They've been bombarded," says Knight. "We have had extremely heavy activity. We caution them not to do business with mail-order people or direct solicitors, that they should do business with their lenders or the preferred list of consolidators on our Web site."
Evan Icolari, associate director of financial aid at the University of Colorado at Boulder, says that although pre-deadline traffic into his office has been fairly consistent for the past three years, the marketing blitz that has accompanied this year's final Stafford/PLUS rate adjustment has made it difficult to guide students. CU also has a Web page devoted to consolidation.
"It would be nearly impossible for us to counsel them in detail about every program that exists," he says.
Mike Reynolds, director of student financial services at Auburn University actually discourages his staff from advising students on consolidation. He is particularly concerned that the lure of lower monthly payments ("Cut your payments in half!") will lead students to extend their loan terms unnecessarily.
"Quite frankly, they've been bombarded with marketing materials telling them they need to consolidate, when for the majority of them, the only thing it will do is send their payments out for 30 years. A lot of the information they get makes them think they have to do it, or that it's the thing to do," he says.
Kay Lewis, director of financial aid at the University of Washington, says the UW consolidation site attempts to give "good neutral consumer information," including the warning not to consolidate certain loans.
"Some of the fixed-rate loans, such as the Perkins loans or health-care loans, you might not want to consolidate with your other loans, especially those that have some unique deferment options," she says. "You might lose some of those deferment options if you consolidated them into a federal consolidation loan."
College rush week
College Loan Corp. of San Diego has been understandably swamped with last-minute consolidation loan applications. The nation's seventh-largest lender in the federal student loan market is a preferred provider to more than 1,100 U.S. colleges and universities.
"Last June (2005) was definitely the busiest month in the history of College Loan Corp. This June is shaping up to be a very active month as well," says Mark Brenner, vice chairman.
Brenner admits that the usually sleepy college-loan market has seen an increase in competition the past few years and especially so with the approach of the consolidation deadline. Even staid old Sallie Mae has pumped up the volume lately.
"There is no question that a number of companies have become more vested and creative in their approach to the student-loan business, and as a result of that, some of the established players have reacted with strong marketing efforts of their own," Brenner says. "That has led to a lot more marketing material and a lot more information for borrowers."
Despite criticism from some that the new college rush, by lenders, has stepped over the line by encouraging students to extend their loan terms in exchange for lower monthly payments, Brenner says borrowers still come out ahead, and the lower payments can help free up money to pay off higher-interest credit card debt.
The daylight at the end of the industry's marketing blizzard, he says, is that borrowers who consolidate can't help but save money, even if they take their loan to term.
"You're looking at a program with no application fees, no credit checks and no prepayment penalties. There's no reason that a borrower, when they get into a better financial situation, can't pay off that debt," he says. "At the same time, it's probably the least expensive loan they're ever going to get."
source from : bankrate.com
Each summer, the Department of Education adjusts the interest rate on its two most popular variable-rate student loans based on the three-month Treasury bill. This July 1, those loan rates will climb by 1.84 percent, one of the largest increases in the history of the federally guaranteed student loan program.
The rate lowdown
The rates for Stafford loans for enrolled students, or those in the six-month post-graduate grace period prior to beginning repayment, will bump up from 4.7 percent to 6.54 percent. Rates for Stafford loans already in repayment will increase from 5.3 percent to 7.14 percent. Rates for PLUS loans (Parent Loan for Undergraduate Students) will climb from 6.1 percent to 7.94 percent.
New Stafford loans issued beginning July 1, 2006, will carry a fixed rate of 6.8 percent; PLUS loans will be offered at 8.5 percent. After June 30, students will not be able to consolidate Stafford loans while they are still in school. Stafford rates are federally capped at 8.25 percent, PLUS loans at 9 percent.
To avoid this nearly 2-point hit to your loan rate, you must consolidate your Stafford and PLUS loans with either your current lender or another before July 1. Congress repealed, on June 15, the "single holder" rule that previously required you to consolidate with your current lender if they issued all of your loans.
Consolidation combines your loans into a new, fixed-rate loan; the interest rate is calculated as the weighted average of the underlying loans. The savings can be significant. According to leading education lender Sallie Mae, a borrower with a $20,000 loan balance who consolidates and locks in at 4.75 percent by July 1 will lower his monthly payment by $22 (from $151 to $129) and save $5,123 in interest over the life of the loan.
Too good, but true
Financial aid expert Mark Kantrowitz, who publishes the nonprofit FinAid.org Web site, hopes the marketing blitz launched by lenders to capitalize on the deadline doesn't inadvertently deter borrowers from consolidating.
"The problem is not whether you need to consolidate; you definitely do, to lock in the current low rate. The problem is that the marketing of this has perhaps crossed the line where there is too much frenzy going on," he says. "My concern is, the student may receive these mailings and think this has got to be a scam because it sounds too good to be true and will then react by not consolidating and therefore lose out on the opportunity."
Some aggressive loan marketers have carpet-bombed student borrowers in recent months with fear-baiting "Final Notices," as well as alluring offers of instant cash rebates, additional interest discounts for on-time payments, and numerous other incentives, all in an effort to win their consolidation business. Although no fees can be attached to student loan application or consolidation, lenders are able to improve their margins and offer borrowers more attractive monthly payments by extending loan terms to 20 or even 30 years rather than the program standard of 10 years.
Before you make your move, read Kantrowitz's loan-consolidation tips. While the savings opportunity is real, so is the marketing hype that can easily lead you astray.
Degrees with debt
These days, two out of every three undergraduate students (65 percent) go into debt an average of $19,202 to pay for college, according to the 2003-04 National Postsecondary Student Aid Study by the Department of Education's National Center for Education Statistics. With interest rates increasing the past two years, consolidation has become an increasingly attractive alternative. In fiscal year 2005, 2.5 million borrowers consolidated nearly $70 billion in student loans, up from $44 billion in fiscal year 2004.
Every summer, campus financial aid offices are flooded with questions from students like Riley McMinn, whose $40,000 in Stafford loans finally forced him to consolidate last summer.
"I didn't know anything about loans or interest rates or anything like that when I started as a freshman," says McMinn, who graduated with a master's degree in exercise science from the University of Mississippi in 2005.
McMinn acted "the day before (last year's) deadline" and consolidated. It not only dropped his interest rate from 4.87 percent to 2.87 percent and cut his monthly payment nearly in half, from nearly $400 to $230, but if he pays on time for 36 months, he'll shave an additional percentage point off his already low fixed rate.
Now out of school and employed at Baptist Memorial Hospital in Oxford, Miss., McMinn says he's glad he consolidated when rates were low.
"If my loan rate were any higher, I think it would be difficult. Now I try to make double payments when I can because it's such a small amount, and I get a tax deduction on the interest," he says.
'They've been bombarded'
Dewey Knight, associate director of aid at Ole Miss, says his office has put out numerous e-mails to every student cautioning them to ignore the marketing blitz, but by all means consolidate before the deadline. They've even put a consolidation section on their Web site that includes links to a "preferred list" of consolidators.
"They've been bombarded," says Knight. "We have had extremely heavy activity. We caution them not to do business with mail-order people or direct solicitors, that they should do business with their lenders or the preferred list of consolidators on our Web site."
Evan Icolari, associate director of financial aid at the University of Colorado at Boulder, says that although pre-deadline traffic into his office has been fairly consistent for the past three years, the marketing blitz that has accompanied this year's final Stafford/PLUS rate adjustment has made it difficult to guide students. CU also has a Web page devoted to consolidation.
"It would be nearly impossible for us to counsel them in detail about every program that exists," he says.
Mike Reynolds, director of student financial services at Auburn University actually discourages his staff from advising students on consolidation. He is particularly concerned that the lure of lower monthly payments ("Cut your payments in half!") will lead students to extend their loan terms unnecessarily.
"Quite frankly, they've been bombarded with marketing materials telling them they need to consolidate, when for the majority of them, the only thing it will do is send their payments out for 30 years. A lot of the information they get makes them think they have to do it, or that it's the thing to do," he says.
Kay Lewis, director of financial aid at the University of Washington, says the UW consolidation site attempts to give "good neutral consumer information," including the warning not to consolidate certain loans.
"Some of the fixed-rate loans, such as the Perkins loans or health-care loans, you might not want to consolidate with your other loans, especially those that have some unique deferment options," she says. "You might lose some of those deferment options if you consolidated them into a federal consolidation loan."
College rush week
College Loan Corp. of San Diego has been understandably swamped with last-minute consolidation loan applications. The nation's seventh-largest lender in the federal student loan market is a preferred provider to more than 1,100 U.S. colleges and universities.
"Last June (2005) was definitely the busiest month in the history of College Loan Corp. This June is shaping up to be a very active month as well," says Mark Brenner, vice chairman.
Brenner admits that the usually sleepy college-loan market has seen an increase in competition the past few years and especially so with the approach of the consolidation deadline. Even staid old Sallie Mae has pumped up the volume lately.
"There is no question that a number of companies have become more vested and creative in their approach to the student-loan business, and as a result of that, some of the established players have reacted with strong marketing efforts of their own," Brenner says. "That has led to a lot more marketing material and a lot more information for borrowers."
Despite criticism from some that the new college rush, by lenders, has stepped over the line by encouraging students to extend their loan terms in exchange for lower monthly payments, Brenner says borrowers still come out ahead, and the lower payments can help free up money to pay off higher-interest credit card debt.
The daylight at the end of the industry's marketing blizzard, he says, is that borrowers who consolidate can't help but save money, even if they take their loan to term.
"You're looking at a program with no application fees, no credit checks and no prepayment penalties. There's no reason that a borrower, when they get into a better financial situation, can't pay off that debt," he says. "At the same time, it's probably the least expensive loan they're ever going to get."
source from : bankrate.com
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