News : Mellody Hobson: Student Loan Consolidation

For Graduates Paying Back Student Loans, Condolidation Is a Must

The June 30 deadline for college graduates, parents and students to consolidate their student loans to avoid rate increases is just two weeks away, and it's time to take advantage of consolidation if you haven't done so already.

Loan consolidation refers to combining multiple educational loans into a single, larger loan that a student pays off each month. According to FinAid, two-thirds of undergraduate students graduate with some debt, and the average federal loan totals nearly $20,000 per student.

What rate increases will take effect as of July 1?

Rates on existing Stafford and PLUS loans (Parent Loans for Undergraduate Students) are variable and change annually on July 1. This year rates will rise a considerable 1.84 percent. Specifically:

• Rates on Stafford loans for current students or those in the deferment or grace periods (you have a six-month grace period after leaving school before you enter repayment) will rise from 4.7 percent to 6.54 percent.
• Rates on Stafford loans currently in repayment will rise from 5.3 percent to 7.14 percent.
• Rates on PLUS loans will rise from 6.1 percent to 7.94 percent.

While these rates have jumped significantly over the past few years, they can only go so high . By law, Stafford loans are capped at 8.25 percent, while PLUS loans are capped at 9 percent.

What does this mean in real dollars for current students or 2006 graduates?

If you are a student or recent graduate with a $20,000 Stafford loan and you consolidate before June 30, you will lock in at a rate of 4.75 percent, which represents a weighted average of the rate of the loan (or loans) being consolidated, rounded up to the nearest one-eighth of a percentage point. At this rate, you will pay about $129 a month and $11,019 in interest over 20 years.

However, if you choose to consolidate your $20,000 loan after June 30, you will likely pay 6.625 percent, increasing your monthly payment to about $150 and your total interest paid to $16,142, meaning you will pay an additional $5,123 over the life of your loan.

Are there any changes to the rules that current or future students should be aware of?

Since the late 1990s, Stafford and PLUS loans have had variable rates that move up or down each year on July 1, with rates based on the three-month Treasury bill yield at the end of May. But the rules for these loans have recently changed. Rather than variable rates, new Stafford loans issued after June 30, 2006, will be fixed at 6.8 percent, while new PLUS loans will be fixed at 8.5 percent. Another important change to the rules affects current students. After June 30, students can no longer consolidate Stafford loans while they are still in school, so consider taking action now.

What is the first step to consolidation?

Before you consolidate, you must take inventory of all your outstanding loans. The best way to do this is to log on to the National Student Clearinghouse Web site (www.nslc.org). You can consolidate your loans at a bank or credit union that is a member of the Federal Family Education Loan Program. Alternatively, you can go directly to the U.S. Department of Education (www.loanconsolidation.ed.gov) or call 800-557-7392. Remember, if all your loans are held with one private sector lender (rather than through the federal government or the direct-loan program), you must give that lender the first right of refusal on the chance to consolidate your loans before shopping around to other lenders.

You should not respond to a phone solicitor who calls you to consolidate your loans. Keep in mind, there are never any fees associated with consolidation, so if the lender requires you to pay an application or credit check fee, find another lender.

What are the rules of consolidation?

Most federal loans can be consolidated. Students can consolidate while still in school, during the six-month grace period immediately following graduation or during the repayment period. Keep in mind that interest rates are lower when you consolidate while you are still in school or during your grace period.

To qualify while still in school, a student needs to request early repayment status from the lender. By doing so, you lock in the lower rate but also wipe out your future grace period. However, students can still defer payments by requesting an in-school deferment until after graduation.

Here are a few stipulations to keep in mind:

• You can only consolidate once. It is not like refinancing a mortgage where you can keep locking in lower rates.
• Second, lenders typically require a loan balance of at least $7,500.
• Additionally, the onus is on the student to identify a lender willing to consolidate loans. Because the clock is ticking, you may want to get a list of preferred lenders from your alma mater or check out www.finaid.com, a Web site that provides a list of lenders offering federal and private loans, including consolidation loans.

Are there other advantages to consolidating?

Not only will consolidating allow you to lock in the lowest rate in history, it also opens the door to other savings opportunities. For example, if you enroll in an automatic debit plan, you could decrease your interest rate by another quarter-point.

Additionally, after 36 months of on-time payments, some lenders will slash your interest payment by up to another whole percentage point. Finally, consolidation loans do not carry any prepayment penalties -- so go ahead and pay more toward your debt -- just be sure to write "principal payment" on the memo line of your check.

Are there any pitfalls to consolidation?Yes. Although monthly payments are lowered because the life of the loan is extended, keep in mind you could pay considerably more in interest over the life of the longer loan. Additionally, when you consolidate before July 1 you forfeit your six-month grace period, which means after graduation you must start repayment immediately. For many graduates still in the job search, this can be a frightening reality. However, you may qualify for an economic hardship deferment that lets you postpone payments for a period of time. Likewise, consider contacting your lender directly to explore options.

Mellody Hobson, president of Ariel Capital Management in Chicago (www.arielmutualfunds.com) is "Good Morning America's" personal finance expert.

source : http://abcnews.go.com/GMA/MellodyHobson/story?id=2082309

Article : Students advised to consolidate loans

The Federal Reserve projects interest rates will rise to 4.35 percent in 2006

By Julia F. Heming, Daily Staff Reporter on 4/6/05

For many graduating seniors, the coming freedom of graduation will not only bring the stress of acclimating to a new setting, but also the worry of paying back student loans. But with the significantly low interest rates, these students could save money by consolidating their loans now.

With tuition ranging from $8,202 to $13,730 for in-state students and $26,028 to $27,456 for out-of-state students, many students turn to loans to fund their education. In the last academic year, 14,200 students received some type of federal loan.

These loans, which require repayment after graduation, are a common source of stress for recent graduates. The average debt of a graduating student with a bachelor’s degree is $18,900, while an average student graduating with a master’s degree has a debt of about $36,900.

But students may be able to save money on these loan repayments if they consolidate their loans now. The Federal Direct Stafford Loan — a loan that provided 13,800 students with aid in the last academic year — has a variable interest rate, which varies with the interest rates for U.S. Treasury Bills. With the interest rate at a low 2.77 percent, Margaret Rodriguez, senior associate director of the Office of Financial Aid, advised students to consolidate their federal direct loans to lock into this low rate.

Students must consolidate their loans prior to July 1 — the date on which the Federal Reserve will change the interest rates — if they wish to keep this low rate.

“There are a lot of misconceptions. (Students) think that they can only consolidate after graduation,” Rodriguez said.

While students can consolidate federal loans prior to graduation, they cannot consolidate many private loans until they begin repayment.

The Federal Reserve projects the interest rate in 2006 will be 4.35 percent, rising to 4.42 percent in 2007 and 4.6 percent the following year.

Economics Prof. Andrew Coleman said these changes in Treasury Bill interest rates show that the Federal Reserve is moving away from its concern about recession and is worried about inflation in the future. “Of course, things can change. There could be large inflation, or there could be a large recession,” he said.

But with the predictions pointing in the upward direction, consolidating loans could help students save up to 10 percent on their debt, according to the Office of Financial Aid. Students can consolidate through the federal direct loan program online or though a private loan consolidation company, an option Rodriguez said she does not recommend.

“It can be confusing,” she said. “We feel that the direct loan program will be understanding towards the needs of students,” she added.

But Barry Coleman, project manager of Clearpoint Financial Solutions, Inc. — a credit-counseling agency based in Richmond, Va. — said students should not be afraid to use private lenders to consolidate. “We recommend that the students shop around and compare interest rates from different lenders,” he said.

LSA junior Becky Marx said she receives the federal direct loan and is very concerned about paying it back. Marx, who plays for the women’s softball team, just transferred from the University of Chicago, where she had a full-ride scholarship. “Softball’s my job, so I don’t have time to make money to pay (back the loans),” she said.

Marx said consolidation sounded like a good idea, but said she did not know enough about it. She said she blames the Office of Financial Aid for not educating students about consolidation.

“You have to go to them for information — they don’t really care if you get the information,” Marx said.

LSA and Art and Design freshman Tiffany Lambert receives the Federal Perkins Loan — a low-interest, need-based loan — and the federal direct loan. She said she would consolidate but has not done so yet because, like Marx, she does not know enough about it. She added that she is worried about the added expense after graduation.

“I want to make sure that my job will be able to cover my living expenses as well as (the loans),” she said.

This may be the last opportunity for students to keep this low of an interest rate on their federal direct loans. If Congress passes a section of President Bush’s proposed budget for fiscal year 2006, students would no longer be able to lock into a fixed rate when consolidating, according to the Detroit Free Press.

Students interested in getting more information on loan consolidation can visit the website of the Office of Financial Aid at http://www.finaid.umich.edu.

Law School student Michelle, who did not wish to give her last name because she did not want her level of debt to be public, said she will be $150,000 in debt when she graduates because of both her undergraduate and graduate education. She also said she would have consolidated her federal and private loans if she had known more about it, but she could see how the bureaucracy of the consolidation application process would stop some people.

“If you’re trying to preserve your credit (rating) and you don’t want any credit inquiries, you might not want to consolidate,” she said.

source : http://media.www.michigandaily.com/media/storage/paper851/news/2005/04/06/News/Students.Advised.To.Consolidate.Loans-1430073.shtml

Article : Debt consolidation: cure or continued credit problems?

By Jenny McCune • Bankrate.com

Interest rates haven't been this low for decades, tempting some consumers to take on additional debt to ease existing credit woes. The goal is to consolidate various higher-interest balances into one, easier-to-handle and less-costly package. But be careful of what looks to be a quick fix. "You're getting symptomatic relief, not a credit cure," says Chris Viale, general manager of Cambridge Credit Corp., a nonprofit credit counseling agency based in Agawam, Mass. This fighting-fire-with-fire approach can take several forms. There are debt-consolidation loans, balance transfers to a zero-percent credit card and home equity loans or lines of credit.

But, says Viale, 70 percent of Americans who take out a home equity loan or other type of loan to pay off credit cards end up with the same (if not higher) debt load within two years.

Viale's statistics underscore a major problem with debt consolidation: It feeds upon the tendencies that got you in trouble in the first place. By taking on yet another creditor, you're adding the proverbial fuel to the fire. In this case, it's your money that's burning.

Plus, if you've taken on so much debt that you're looking for more as a solution, chances are you won't qualify for the very low interest rates you see advertised. Those generally go to people with stellar credit ratings.

However, if you're at the end of your credit rope or swear that this time you'll be more disciplined, debt consolidation may be something to consider despite its risks. Here are some popular forms of debt consolidation, how they work and a look at their pros and cons.

Home equity loan or line of credit

Home equity lines or loans often are touted as a quick and easy way to get out of debt. By leveraging your residence's value, the pitch goes, you can get money to pay off other bills and a tax break, too.

But borrowing against your house can backfire. The biggest risk: You could lose your home if you default on the loan.

"Some hardship occurs and now they have double the debt and if it's secured by their home, they could lose it," says Diane Giarratano, director of education at Garden State Consumer Credit Counseling in Freehold, N.J.

And while equity loan interest generally is tax deductible, it could be limited in some situations. Even when it does provide a tax break, Cambridge's Viale says "that doesn't mean it makes fiscal sense."

Giarratano agrees. "Banks will tell you how much you can borrow," she says. "That doesn't mean you should borrow the total amount, but that's what people do."

Still, a home equity line of credit or loan to pay off creditors can work for some debt-burdened homeowners. Just be sure to do your homework to guarantee that the home equity dollars and cents make sense. This Bankrate calculator can help your determine whether borrowing against your home's equity is a wise move.

Zero-percent credit card

What about people who don't own a house? In these cases, many turn to zero-percent credit cards to reduce debt. Again, prudence and discipline are required.

Companies offer these rates as teasers -- enticements for you to switch credit card vendors. Much of the time, card companies target consumers with better credit, so that may leave someone struggling with debt without this option.

Even if you do qualify for a zero-percent or similar single-digit rate, it won't last forever. Make sure you know when it will end and what the rate is expected to jump to when it does.

The low rate also lasts only if you pay on time. One late payment and the credit card company will jack up the rate. Also look for hidden fees and charges that can increase the actual cost of credit.

"It's a short-term fix," says Viale. "The only way it works is if you are really meticulous about paying it and stay on top of it and then move onto another credit card before the low interest rate expires."

Opening new credit card accounts every six months, however, could negatively affect your credit rating, he cautions.

And to successfully lower your debt load, you'll need to pay far more than the smallest amount the card company will accept, especially after that zero rate disappears. "Paying the minimum for a $20,000 debt won't cut it," notes Viale.

Bankrate's minimum payment calculator illustrates Viale's assessment. Say, for example, you transferred $20,000 of other debt to a zero-percent card and paid $1,000 on it by the time the rate jumped to 14 percent. If you make only the minimum monthly payments, it will take you 1,134 months -- or 94.5 years -- to erase your remaining $19,000 balance. If you live that long, you'll pay $64,805 in interest. And that's presuming you don't charge another thing during that time.

Debt consolidation loan

Did the credit card computations scare you into looking for another option? There's always a debt-consolidation loan. Offers for these financial products are an e-mail box staple. Chances are you get a dozen or more everyday suggesting this as the solution to your growing debt problem.

A major appeal of consolidation loans is convenience. Instead of paying 20 different creditors who are charging different rates at different times of the month, you take out one big loan and pay off all those accounts. Then you make a single payment on that loan once a month.

But ease doesn't automatically translate to savings.

Before you sign on the dotted line, be sure that the costs of the new, bundled loan will truly be less than what you're already paying various creditors. For many consolidation-loan candidates, their current credit woes mean they won't get the lowest-available interest rate. Plus, when there is nothing to secure the loan (such as your home), expect the lender to bump up the rate.

Calculate interest and fees on all your existing accounts to determine the total of the payments you now make. Then compare those amounts with the consolidation loan numbers to make sure it truly is a better choice.

And, as with any product, shop around. The bank down the street may offer an attractive loan rate, but a check of your local credit union could turn up better terms, says Deborah McNaughton, author of "The Get Out of Debt Kit."

"Credit unions also tend to be more lenient than the banks," adds McNaughton.

Managing, not adding, debt

Viale is a much bigger fan of debt management, which isn't a surprise since he heads up a debt management firm. But McNaughton and other experts also point to credit counseling instead of shifting debt as the way to go.

They favor debt management because it costs less and is quicker than a debt-consolidation loan. Viale says someone owing $20,000 would end up paying $6,000 to $8,000 in interest and fees and be debt free in four to six years by using a credit counselor. If that person took out a 15-year home equity loan at 10 percent (because his credit wasn't good enough to get him a lower rate), Bankrate's loan calculator shows he'd end up paying $18,686 in interest on top of the twenty grand he borrowed.

But if you just can't get a handle on your bills by yourself, you should explore credit counseling. Getting professional help in managing your debt can help you change your credit behavior. People that have taken on too much debt tend to go into denial; they'd rather not know how much debt they owe. A professional debt manager will make you face up to your obligations.

Credit counseling agencies also force you to stop racking up debt. In exchange for consolidating your debt and working with your creditors to reduce your payments, credit counselors require you to give up your credit cards.

Credit counseling, however, is not without its costs.

One downside is that your reduced payment plan will probably show up as a mark against you on your credit report. Even though your creditor agreed to the reduced payment, you technically did not pay your account as called for in your original credit agreement.

An even more costly potential pitfall is the disreputable debt counselor. As this Bankrate story points out, some credit counseling and debt-consolidation companies are only interested in making a quick buck on debt-ridden consumers. Some firms offer shoddy service at sky-high fees. Others are out-and-out scams.

To find a reputable firm, verify certifications or third-party registrations. Check with the Association of Independent Consumer Credit Counseling Agencies or the National Foundation of Credit Counseling to see if the service you're considering is a member of either group. Also ask the service for references and then confirm them.

Make sure that the debt management or credit counseling firm answers all your questions and that you have a firm understanding of how the process will work and what it will cost. If the company won't give you straight answers or you don't understand what's going on, don't sign up with that company.

Jenny C. McCune is a contributing editor based in Montana

source : http://www.bankrate.com/brm/news/cc/20031007a1.asp