Consider consolidating student loans

Consider consolidating student loans
Jean Chatzky: Consider consolidating student loans
This is the time of year when the buzz starts up about student-loan consolidation. Some people benefit from consolidating, others don’t, and borrowers want to know which camp they fall in.

Here are the facts: Until recently, borrowers were able to consolidate their loans each year at a low-interest rate — sometimes under 3 percent. In 2005, Congress set a fixed rate for Stafford and PLUS loans. This means that loans originating after July 1, 2006, largely won’t benefit from consolidation. In fact, if you consolidate, your interest rate will increase slightly.

If your loan originated before that date, you’re working with a variable-rate loan, and you’ll benefit from consolidating come July 1, when rates are set to drop by 3 percent, according to Mark Kantrowitz, publisher of FinAid.org.

To figure out what kind of loans you have, do a little backtracking. What year did you enter school? What year did you graduate? How many years of loans do you have, total?

You may find that you have both, particularly if you graduated in the last few years. "Undergraduate students who graduated last year and who had not previously consolidated their loans would have three years of variable-rate loans and one year of fixed-rate loans. Undergraduate students graduating this year would have three years of variable-rate loans and two years of fixed-rate loans," explains Kantrowitz.

No matter what your situation, here’s what to do when July 1 rolls around:

If your loans are fixed, you probably want to shy away from consolidating. There’s no savings to you in doing so. However, some borrowers choose to consolidate anyway, for a couple of reasons. By definition, it makes things a bit simpler by putting your loans all on one payment, which can ease your mind and also help to ensure that payments are going in on time each month. However, Kantrowitz says that these days, most lenders offer unified billing anyway, so consolidating for this reason is largely unnecessary.

Another potential perk of consolidation is that it comes with a wider variety of repayment options, so if you’re struggling to make ends meet, you can increase the life of the loan and thus make your monthly payments smaller.

If your loans are variable, rates reset annually on July 1, but you can consolidate only once. This July is a great time to do it if you haven’t already. Consolidating will bring Stafford Loans that are in repayment to an interest rate of 4.25 percent and PLUS loans to 5.125 percent. If you’re still in school or under the grace period after graduation, your Stafford Loan rate will be 3.625 percent. This is not only the biggest drop ever in the interest rates on variable-rate loans, but according to Kantrowitz, they are the lowest rates in the history of the student-loan program. So take advantage, and you could save several thousand dollars over the life of the loan, depending on how much you borrowed in the first place.

Don’t be surprised if you have trouble finding a lender. Consolidation loans are no longer all that profitable, and many lenders have pulled out of the business — including Sallie Mae, according to Martha Holler, a spokesperson for Sallie Mae. The current economy and credit crunch isn’t helping matters. If you shop around and can’t find a private loan company to consolidate with, Kantrowitz suggests turning to the Federal Direct Consolidation Loan program (loanconsolidation.ed.gov). You can consolidate both Direct Loans, which are issued by the government, and private loans (typically called Federal Family Education Loans or FFELs) through this program, which will give you all the options offered by private lenders — namely, multiple repayment plans and only one check to write each month.

Stick with a 10-year loan if possible. As I mentioned, when you consolidate, you’ll be given the option to lower your monthly payments by repaying the loan over the course of 20 or even 30 years instead of the standard 10.

"In some cases, you can cut your monthly payment in half, but you will pay more over the life of the loan," warns Holler. Make sure that you’ve exhausted any other options, such as making cuts in your budget or working a few overtime hours, and resort to this as a last step.

One caveat: If you, like about 75 percent of your peers, came out of college with not just student loans but also a load of credit-card debt, and you’re feeling squeezed, it may make sense to extend your loan and focus on the credit cards for the time being. Student-loan debt is largely considered good debt, because the interest rates are about as low as they come, and they generally help round out the credit reports of borrowers who may not have much of a history otherwise. The interest rates on credit cards can be three or even four times that of a student loan, so you’ll save in the long run by throwing the bulk of your money at that debt first.
source-http://www.star-telegram.com/family_day/story/706461.html