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The barrage of junk mail and SPAM enticing students to consolidate all of their student loans into one low-fixed rate is about to subside soon.
Students have two choices - they can either consolidate their student loans before July 1 and "lock in" a fixed 4.7 percent interest rate and sign a waiver to give up their 6-month grace period or pay thousands of dollars more in interest as the rates rise to 6.5 percent while in-school and to 7.1percent during repayment after July 1.
"It's complicated because the student loan companies are marketers," said Patrick McTee, UCDHSC Director of Financial Aid. "They give you a lot of hype. They make it sound like it's 'do or die.' They make their pieces look like federal government mail. Students, rightfully so, are confused about all of this mail that they are getting. It's difficult for them to understand the student loan consolidation process."
Through July 1, 2006, all student loans are at a variable interest rate - anything thereafter is at a fixed interest rate because of the Deficit Reduction Act of 2005 that gutted $12.7 billion from federal student loan programs.
Starting July 1, the rate for any new subsidized or unsubsidized Stafford loan jumps to 6.8 percent. "When the interest rates hovered around 2 percent two years ago, that sounded like robbery," he said. McTee said that students who are weighing the pros and cons of consolidation should contact their financial aid office. Most financial aid officials look at a large number of consolidators and try to guide students through the process, he said.
"It's really to students' advantage to consolidate," he said. "Are you severely hurting yourself if you don't? Probably not, but you're pinching your pocketbook a little more. You can take a gamble and not consolidate and assume the loan [rates] will go down, but the way things look right now, that's not going to happen again in the immediate future."
The biggest glitch is that the Single Holder Rule prohibits, by law, students from "shopping around" for the best consolidation deal if all of their Stafford loans are handled by one lender (excluding Perkins).
Elimination of the Single Holder Rule is still possible because it is a provision of the Emergency Supplemental Appropriations Bill (H.R. 4939), which passed both the House and Senate and was sent to conference committee on June 13.
"The Single Holder Rule is in limbo," said Katie Powell of CollegeInvest. "The passage of H.R. 4939 could be the new order of the day. It's speculative to say, but that's our best guess."
There are two types of consolidation - in-school and post graduation. "The in-school consolidation is kind of a new thing," McTee said. "With this interest rate change, suddenly in-school consolidation became really popular. The reason that these consolidation companies are pushing it so much is because they make a lot of money off of it. It helps you, but it also fills their coffers."
The Office of Financial Aid recommends that students check out CollegeInvest, a local state agency and nonprofit that specializes in providing students with financial resource management. CollegeInvest was created in 1979 and falls under the auspices of the Colorado Department of Higher Education.
"What we've tried to do is evaluate the benefits of all the lenders," he said. "We believe that CollegeInvest has the best benefits for students in terms of incentives. By virtue of being a nonprofit, CollegeInvest can offer students a better deal."
*CollegeInvest* CollegeInvest promotes student-friendly perks including a 1 percent up-front principal balance reduction, a 1 percent interest rate reduction after you make 24 consecutive on-time monthly payments, and 0.25% interest rate reduction when you sign up for automatic loan payments.
For example, students in their grace period or still in-school with a $20,000 balance and a 20-year repayment plan can save $4,069.64 in interest by consolidating before July 1. By comparison, students can save $3,381.33with Sallie Mae and $2,129.73 with Nelnet using criteria in the January 2006. (Source: Borrower Benefits)
"We're working solely for you-the student and in the student's best interests," said Powell, Marketing Communications Manager for Student Loans.
"We pull up your whole portfolio and we look at how best to manage your student loans. We give a fair assessment of what works for you in the long run. Every student's situation is different."
*Nelnet* Nelnet offers comparable perks including a 1 percent interest rate reduction after 36 initial, on-time payments or a one-time 3.33 percent principal balance reduction after 30 initial, on-time payments. Plus, if you consolidate your loans prior to the end of your 6-month grace period, you can earn an extra 0.6% interest rate reduction.
According to Nelnet, students in their grace period or still in-school with a $20,000 balance and a 20-year repayment plan can save almost $5,123 in interest by consolidating before July 1. Note: this figure differs from CollegeInvest's earlier estimate.
"We're a full-service station," said Eric Solomon, Nelnet spokesman. "We act as originator, guarantor, and consolidator in the servicing of student loans. There is a tradeoff between locking in the lower interest rate by July 1 and keeping your 6-month grace period."
*Repayment Options* Just remember, federal mandates require that all consolidators offer a variety of repayment options. For example, Sallie Mae offers standard repayment, graduated repayment, income-sensitive repayment, income-contingent repayment, and extended repayment. If your income is really low, if you are having real difficulty and you can prove it, the lenders can give you these forbearance options, McTee said.
"The borrowers that get in trouble and default on their loans are the ones that avoid the calls," he said. "If you talk to them, they will usually figure out a way to help you. But if you ignore them, then you will get in trouble. Even though your loans are guaranteed by the government, they still lose money if you default on them."
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