Student Loans: Easing the Burden – loan consolidation – Brief Article

Get a break on your payments so you can manage your other debt, too.

It’s payback time for students who graduated from college last spring owing money on federal student loans. Your six-month-long grace period is about to end, and the money you owe–an average of $16,600 for undergraduates 18 to 25, according to Nellie Mae, a major student-loan provider–is looming large. The burden is still heavier when you add on credit card debt, which Nellie Mae says averages $2,000 for the same group of students, and maybe even payments you’re making on a new car. What’s the best way to balance the load?

Rebecca Carter has a plan. Carter, 31, is a veteran of student loans, having repaid about $7,500 from her first stab at college a decade ago. Two years ago she returned to school to complete her degree in business administration at Eastern Nazarene College, in Quincy, Mass.; she graduated in August with $23,000 in outstanding loans.

Carter is wiser, if not richer, the second time around. Before she begins repayment next March, Carter plans to consolidate loans from three lenders (with interest averaging about 7.5%) into a new loan from a single lender, and to extend the payment term from the standard ten years to 20 years. Carter estimates that loan consolidation will reduce her monthly payments 40%, so that she’ll pay between $200 and $250 a month. That will give her breathing room to make payments on her more-expensive car loan at 11%.

Once the car is paid off, she hopes to put the extra money toward the student loans and still repay them in ten years. “I understand debt a lot better this time around because I’ve lived it,” says Carter, who is also a manager of loan origination at Nellie Mae.

A WINNING STRATEGY. Carter’s plan to knock off her more-expensive loan first and then concentrate her resources on her remaining debt is a winner, says Amy Cole, an educator at the Consumer Credit Counseling Service of Southern New England. A credit card charging 18% interest is a heavier burden than a student loan: The highest rate on student loans currently outstanding is 8.25%. If student loans are your only liability, focus first on those with the highest rate. Even if your budget is tight, don’t rule out investing some of your resources if you can earn a higher return than the interest rate you’re paying on your loan.

The standard repayment plan for student loans calls for equal monthly payments and a ten-year payback period. If that’s more than you can afford, call your lender before the grace period ends to ask about other repayment options. For example, Carter is a prime candidate for loan consolidation because she owes money to three different lenders at different rates. With the consolidated loan, the interest rate will be a weighted average of all the loans, rounded up by one-fourth of a percentage point. Variable rates for government-sponsored Stafford loans are unusually low now, so consolidating locks in an attractive rate. Once you’re locked in, however, you’re stuck if the Stafford rate happens to drop in the future.

When consolidating loans, start with your current lender, advises Robin Leonard, author of Take Control of Your Student Loan Debt (Nolo.com, $19.95; 800-992-6656), and shop elsewhere if you don’t like the terms. The U.S. Department of Education, for example, is offering an interest-rate reduction of 0.6 percentage point for borrowers who consolidate before starting repayment. Most lenders will also reduce the interest rate if you pay electronically, with a further reduction of two percentage points once you make 48 consecutive on-time payments.

OTHER TACTICS. If a loan consolidation doesn’t suit your needs, consider a graduated repayment plan, which starts out with monthly payments that are about 50% of those under a standard plan. Payments will gradually increase until you’re paying more each month than you would under a standard plan: While the higher payments may be manageable if you expect your salary to keep pace, there’s a chance you’ll have difficulty qualifying for another loan, such as a mortgage, later on. And you do end up paying more in interest, especially if you take more than ten years to repay. “Once you lower the payment or increase the term, a $25,000 loan can end up costing $40,000,” says Diane Saunders of Nellie Mae.

If your finances are too shaky to manage either a standard or a graduated plan, some lenders will extend your repayment period up to 30 years, with monthly payments as low as $50. You can also choose an extended repayment plan that fluctuates with your income; monthly payments are calculated each year based on annual income for the previous year or on current monthly pay stubs.

Beware of letting payments drop too low, or you may find yourself paying interest only and never tackling the principal, warns Patricia Scherschel of the USA Group, which services student loans. But because you are entitled to switch plans at least once a year, a repayment option that increases the cost of your loan needn’t be permanent. “As soon as you get promoted or earn more, you should send in more money or switch to a standard plan,” advises Michael Kidwell of Debt Counselors of America.

If you return to school, you can request a deferment, which lets you suspend payment until you complete your studies. If you are unemployed or are temporarily disabled, you can defer for up to three years; the government will continue to pay the interest on your subsidized loans.

If you can prove financial hardship for some other reason, you can apply for forbearance. That has the same grace period as deferment, although interest continues to accrue even on subsidized loans. Forbearance should be a last resort, because when you finally pay back the loan, “you’re going to be making a payment that is even higher than the one you were uncomfortable making the year before,” says Scherschel.

Student loan survival guide: drowning in student loans? Save yourself from debt using our simple step-by-step plan

Philip Jones wanted nothing more than to marry his fiancee, fly away to Costa Rica, and embark on the rest of his life. But something was holding him back–the $40,000 in student loans he owes to Direct Loans and Sallie Mae.

Jones, 30, was stressed out because he knew that if he fell behind on his loan payments, the U.S. Department of Education could provide offsets against Social Security payments and garnish his wages and tax refunds, without a court order. Until recently, only the Internal Revenue Service wielded such power.

Luckily, the 2004 graduate of Rutgers University College of Engineering knew a little something about forbearance, a temporary suspension of loan payments that most lenders will allow when times are tough. For Jones, his wallet was being pulled in too many directions; he was trying to pay for a house, a wedding, and a honeymoon within a six-month period.

“I didn’t have to make a payment for six months, so that money went toward the wedding and honeymoon. It’s easing the financial stress,” says the mechanical engineer, who works for Hayes Pump Inc., an industrial equipment distributor in Fairfield, New Jersey.

or the class of 2002, the most current information available, the median student debt was $16,500, according to Sallie Mae, the nation’s leading provider of education funding. And with the average college debt burden increasing, many recent grads are finding it hard to manage when the bills are due.

 

While Jones opted for forbearance, there are plenty of other ways to stay on track with student loan payments without breaking the bank. Erin Korsvall, spokeswoman for Sallie Mae, offers a few tips for taking the pain out of repayment.

* CHOOSE YOUR REPAYMENT PLAN CAREFULLY. “There are a number of different repayment options to help you manage your monthly payments,” Korsvall says, offering income-based and interest-only payments as examples. Borrowers can also extend their payment terms to lower the monthly payments.

“Each situation would apply for borrowers who are in a position where they need to minimize their monthly payments. Perhaps they are a recent graduate who has just entered the work force,” she says.

* STAY IN TOUCH WITH YOUR LENDER “Make sure they have your current address. You don’t want to miss the bills,” Korsvall says.

* PAY ON TIME. “It’s the best thing to do,” Korsvall says. “Sallie Mae offers an interest rate discount when you pay on time. There are no pre-payment penalties.”

One way to ensure you pay on time is to pay electronically. There are a number of benefits associated with electronic payments, in which the lender takes the money directly from your bank account. Payments are never late, so the borrower never has to worry about late fees. This also builds good credit, showing lenders that payments are consistently paid on time.

Forgoing stamps has another advantage. Some lenders, including Sallie Mae, will lower your interest rate if you choose to pay back loans via direct debit. For example, one borrower saw his interest rate drop from 4.8% to 4.25% after he switched to electronic payments. Between consolidating his debt and paying by debit, this student was able to lower the monthly payment for his Perkins and Stafford loans from about $300 to $138.

* ALERT LENDER BEFORE MISSING A PAYMENT. “The consequences of default are significant and could include a tarnished credit rating, garnishment of pay, and the inability to obtain additional aid and future credit,” says Chris Greene, spokesman for the U.S. Department of Education. “In addition, legal action can be taken to recover unpaid loan balances and fees. If borrowers are experiencing trouble meeting their obligation, they should contact the Department of Education at 1-800-4FEDAID or their lender directly.”

Borrowers have 270 days of nonpayment before their loan goes into default, according to the Department of Education. If the loan holder can’t recoup its money, it may then decide to use an outside agency to try to collect the money. If that happens, as much as 25% of the amount of the loan could be added to the loan to cover the cost of collection.

“The last thing the department wants is for a borrower to go into default and force us to collect on the loan. Borrowers experiencing difficulties in making payments should contact their lender or the department, and we will work with them,” Greene says. “Remaining in an active, current repayment status is in the best interest of the borrower and the department.”

The government is currently trying to collect about $31 billion in defaulted loans, according to the Department of Education.

* TAKE A BREAK FROM PAYMENTS. Borrowers can postpone repayment through deferment or forbearance. Both allow for a period of time when the borrower doesn’t have to make payments, and they are better alternatives to defaulting.

Deferment allows borrowers to stop loan repayment for specified periods of time under certain conditions, such as re-enrollment in school, unemployment, or economic hardship. You must formally request a deferment from your loan holder. You may need to complete a deferment form and show documentation that you are eligible for the deferment, according to the Department of Education. There is a three-year limit for deferring loans for those with an economic hardship or full-time unemployment. There is no limit for deferment based on reenrollment in school.

Forbearance is an option for borrowers having temporary financial difficulty. You may suspend or reduce payments under certain circumstances and for specified periods. Forbearance is granted in increments for up to one year.

During deferment and forbearance periods, interest continues to accrue on your loans. This interest will be added to the amount you owe and must be repaid when payments resume. The only exception is for subsidized Stafford Loans. The federal government pays the interest if students qualify for deferment, according to Sallie Mae.

With forbearance, you may choose to pay the interest as it accrues. Any unpaid interest is added to your principal balance, no more frequently than quarterly, according to Sallie Mae. For example, if you owe $15,000 at 5% interest and have a 12-month forbearance, interest would be applied only four times that year, or quarterly, rather than monthly. So, interest accrued on the loan in forbearance would be $250 rather than $750.

Jones says he didn’t have to jump through hoops to get his forbearance. “It was just a phone call. It was easy. I asked for it and they said OK. They asked some questions. I was honest,” he says of his 10-minute conversation with Direct Loans.

The Department of Education offers an online forbearance application for students with Direct Loans that asks why the borrower is requesting the forbearance and if the borrower wants to temporarily stop payments or reduce them. If the borrower just wants to reduce payments, he or she can specify the monthly payment. The form must be printed, signed, and mailed to the Department of Education’s Direct Loan Servicing Center. Students with Federal Family Education Loans should contact their respective lender for deferment and forbearance application instructions.

Borrowers are required to meet certain standards to be eligible for forbearance, such as being unable to meet the monthly payments because of financial hardship. For a deferment, the borrower must be a part-time college student, in a graduate fellowship program, in a rehabilitation training program (for those with disabilities), actively seeking but unable to find full-time employment, or having financial hardship.

* CONSIDER COMBINING YOUR LOANS. Denice Richards chose to consolidate her loans to reduce her payments. Richards graduated in 1997 with $12,000 in loans and a degree in journalism from Grambling University in Louisiana. The sections editor for ANG Newspapers/MediaNews Group in Pleasanton, California, had paid $4,000 of her debt when she decided to consolidate in 2003.

“They were offering a 4.75% interest rate,” she says of the Citibank loan, which was at least half a point lower than what she was paying at the time. Richards says consolidation was the only option she considered. By consolidating, Richards cut her monthly payment in half, to $78.

If you consolidate with Sallie Mae, there is an immediate .25% deduction on your interest rate, Korsvall says. And there is a one percentage point reduction after 36 months of on-time payments.

But there is a drawback to consolidating: borrowers start over with their payments because they refinance their loan.

“When I consolidated, I had paid five years into my cycle. But now I have another 10 years to pay it off. So instead of paying it off for 10 years, it’s 15. If I didn’t consolidate, I’d only have three years of payments left,” Richards says.

Korsvall advises borrowers considering consolidation to research it thoroughly first. “When you consolidate, you can’t unconsolidate. And in many cases, you cannot reconsolidate. So it’s very, very important to get expert advice,” she says.

Steven L. Johnson, director of the Office of Financial Aid at Howard University in Washington, D.C., said consolidating isn’t the cure-all for every borrower.

“Consolidation may be a very reasonable option for students. However, we do not recommend one simple solution for all students,” he says. “Consolidation is something to be considered on an individual basis, and the decision to consolidate should be contingent on many factors” such as debt-to-credit ratio, the amount of available credit, income, and changes in financial circumstances.

Students who have several types of loans from several sources, such as the Department of Education, Sallie Mae, and Nelnet, may be encouraged to consolidate to simplify payments. However, students who have few loans from one source maybe discouraged from consolidation, says Derek Kindle, a financial aid officer at Howard.

* THINK AHEAD. While borrowers have many options when preparing to repay loans, Johnson says students should start thinking about how they will pay even before they apply for their first loan.

“Really budget your educational costs before taking out student loans. Many students decide to take out loans before fully exploring available grants and scholarships. Each year, billions of dollars in scholarships from various sources go unspent because of the lack of applicants,” Johnson says. “Students and parents who take the time to make realistic college budgets and payment plans will usually find innovative ways to pay for college without taking out huge amounts in loans.”

But for those who have to take out loans, Korsvall says the debt is considered “good debt.” “We always consider student loans to be good debt versus bad debt because of what they offer–very competitive interest rates, deferment and forbearance, and the flexible repayment options.”

Resources for Borrowers

* To help students and their families understand their rights, responsibilities, and repayment options, federal student loan borrowers are required to undergo entrance counseling when they enter school and exit counseling before graduation, says Chris Greene, spokesman for the U.S. Department of Education.

* Students with questions that cannot be addressed by college officials should contact their lender or the Department of Education at 800-4FED-AID or visit http://www.studentaid.ed.gov.

* If a borrower defaults on a student loan, he or she should visit http://www.ed.gov/offices/OSFAP/DCS/index .html, the Federal Student Aid Collections Website, for tips on Federal Family Education Loans, Direct Loans, Federal Perkins Loans, Federal Pell Grants, and Federal Supplemental Educational Opportunity Grants.

* If you want to set up a monthly payment plan on your defaulted loan, contact the Department of Education’s customer service center at 800-621-3115.

* If you have damaged your credit because of a defaulted loan, you must complete a loan rehabilitation program, which requires you to make 12 consecutive payments at a reasonable rate. Once you have made the payments, the loan will be rehabilitated and it will be taken out of default. Information about this program can be found at http://www.ed.gov/offices/OSFAP/DCS/rehabilitation.html.

* Defaulted loan payments should be mailed to: National Payment Center, P.O. Box 4169, Greenville, TX 75403-4169.

* Information about consolidating loans can be found at http://www.studentloansreport.com/consolidate.html.

* Other information about student loans and payment options can be found at Sallie Mae by visiting http://www.salliemae.com. From the Website, you can apply for a loan, manage existing loans, and search for jobs through TrueCareers.

* Sallie Mae also offers a hotline for anyone with questions about their loan. The number is 800-448-3533 and is not limited to Sallie Mae borrowers.