Saving on Your College Loans as Easy as A-B-C

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Saving on Your College Loans as Easy as A-B-C 

There's never been a better time to borrow money for college, or to consolidate student loans.

On July 1, 2002, the interest rate on federal Stafford loans dropped from 5.99 percent to 4.06 percent, the lowest rate in the 36-year history of the student loan program. Past student loan borrowers never had it this good.

"When the program started in 1965, the rate was 7 percent," says Barry Morrow, chief executive officer at Collegiate Funding Services. "So this is unprecedented territory."

Parent borrowers also have plenty to cheer about. In July, borrowers with a Parent Loan for Undergraduate Students (PLUS) saw the interest rate drop from 6.79 percent to 4.86 percent, the lowest rate ever.

The rock-bottom interest rates only apply to Stafford loans and PLUS loans disbursed after July 1, 1998. The interest rate drops remain in effect through June 30, 2003. All you have to do is sit back and enjoy the cost savings.

Let the savings begin

With such a gloomy job market, recent college grads could use some good news. A few more dollars in their pockets won't hurt either.

"The job market is still very, very soft," Morrow says. "Even people finding employment aren't finding the big salaries of a couple of years ago."

Getting a leg up in the real world is awfully tough when jobs are hard to find, paychecks are lower than expected and you've got a big chunk of student loan and credit card debt to pay off. Lots of grads are getting by on some awfully tight budgets. Unbelievably low interest rate on student loans can help.

Let's look at an example.

In July, a borrower with a $20,000 Stafford loan balance and a standard 10-year repayment plan saw the monthly loan payment drop from $221.94 to $203.06.

Many cash-strapped recent grads would welcome an extra $18.88 a month. It's not chump change and neither is the $226.56 they'll save over the course of a year.

Borrowers still in school are catching a break on interest rates, as well. The rates on their Stafford loans droped from 5.39 percent to 3.46 percent on July 1. This is great news for students with unsubsidized Stafford loans who pay interest on loans while they're in school. The ultra-low rate means they are paying less interest for the 2002-2003 school year and will owe less money upon graduation.

The Stafford program is the largest source of student loan funds in the country. During the 2001-2002 school year, 5.6 million students borrowed about $35 billion in Stafford loans, according to a spokeswoman at the U.S. Department of Education.

There's help for earlier borrowers, too. Stafford and PLUS loans disbursed prior to July 1, 1998 have slightly higher interest rates than more recent loans. But those interest rates are still lower than they've been in years. Alan Greenspan and the interest rate cut frenzy of 2001 saw to that.

Consolidation to the rescue

With interest rates this low, there's never been a better time to check out a federal consolidation loan. It's a great way for a borrower to lock in a super-low rate for the life of the loan. A consolidation loan lowers a borrower's monthly loan payments by as much as 40 percent and can also stretch out the repayment period.

"Anyone with anything over $10,000 in federal student loans should look into this," Morrow says. "It's a once in a lifetime opportunity."

It's tough to imagine interest rates on education loans dropping much lower. There's never been a better chance to lock in those low interest rates in a consolidation loan.

The interest rate on a consolidation loan is determined by taking the weighted average of interest rates on federal education loans and rounding up to the nearest one-eighth of a percentage point, capped at 8.25 percent. With a consolidation loan, your lender pays off the balances of all the loans you choose to consolidate and then issues you a new loan.

Let's say you have $25,000 in Stafford loans and a standard 10-year repayment schedule. Last July, your monthly payment dropped to $254 a month, a $22 drop from the previous year.

You could get that monthly payment even lower and lock in a low interest rate by signing on for a 20-year consolidation loan.

By signing on for a federal consolidation loan, you could lock in an interest rate of 4.125 percent and have monthly payments of just $153.

An extra $101 bucks a month can make a big difference when money is tight. Is high-interest credit card debt weighing you down? You could tack an extra $100 on your credit card payment each month until your balance is gone.

And you can always plop that extra 100 bucks right back into your monthly loan payments as soon as you can spare the cash. There are no prepayment penalties with federal consolidation loans. So you can pay more than your required monthly payment anytime you want.

The rules for consolidating

Ready to sign on for a consolidation loan? The low interest rates will be available until June 30, 2003. So there's no need to rush.

Take your time and do plenty of research. It's important to make an informed decision, because once you consolidate your loans there's no going back.

"You can't undo a consolidation loan," "That's why we like borrowers to get it right the first time."

This is complicated stuff, so be sure to consult an expert. Information, applications and calculators for consolidation loans are available on the NextStudent , Collegiate Funding Services , and College Loan Corporation Web sites. Information on consolidation loans from the U.S. government is available on the U.S. Department of Education Web site .

Don't forget to contact your student loan lenders. They'll have information on consolidation loans as well.

Ask plenty of questions and be as specific as possible. The aim is to find out how your particular mix of student loans might be consolidated. A general example won't do.

"A consolidation loan is basically a custom fit loan," Scherschel says.

New graduates may want to weigh the pros and cons of consolidation loans fairly quickly. After they leave school there's a six-month grace period before their loan payments begin. By consolidating during that grace period, they'll lock-in a 3.46 percent rate on Stafford loans, rather than the 4.06 percent rate that kicks in at the start of the repayment period.

"This is far and away the best opportunity for recent college grads to consolidate their loans," says Mark Brenner, general counsel at College Loan Corporation "You save an additional 60 basis points if you consolidate in grace."

The only drawback? You'll need to start making payments immediately. Not ready to give up that blissful, payment-free grace period? There are a couple of ways you can shave down the interest rate on a consolidation loan and still keep your grace period.

Some lenders will reduce the interest rate on a consolidation loan by a quarter percent when you sign up to have your monthly loan payment debited from a checking or savings account. A lender may also knock down your interest rate by 1 percent after you make 48 consecutive on-time payments.

Be sure to ask about these discounts when shopping for a consolidation loan. These rate reductions are available to student loan borrowers as well.

Lots of borrowers end up signing on for a consolidation loan because they need more breathing room in their monthly budgets. If your student loan payments add up to more than 8 percent of your gross monthly salary, you're a good candidate for a consolidation loan.

Someone making a salary of $30,000 a year may have a tough time making $200 student loan payments in addition to rent, car payments and other expenses.

With rates so low, financial experts urge everyone with student loans to take a look at a consolidation loan within the next year.

When not to consolidate

As good as a consolidation loan may sound, it's not for everyone. Anyone participating or planning to participate in a loan forgiveness program would want to pass on a consolidation loan. Why consolidate your debt when you can cancel it instead?

A college grad can cancel part or all of their federal education debt by working in public service jobs -- lower-paying professional jobs that serve low-income communities -- or by volunteering. Loan forgiveness programs are available to everyone from teachers to nurses to young doctors and lawyers to Peace Corps volunteers.

Teachers who work in low-income elementary or secondary schools may be able to cancel as much as $5,000 of their federal Stafford loan debt. The five grand gets eliminated from a teacher's loan balance after he or she completes five years at a designated low-income school. For more information on loan forgiveness programs check out this article from Bankrate.com.

Borrowers who are approaching the end of their repayment terms may want to pass on consolidation as well. They may be better off stepping up payments in the next year. With such low interest rates on education loans, they may be able knock out a good chunk of their remaining principal by boosting their monthly payments. Paying an extra $50 a month is a good place to start. Paying an extra $100 is even better.

One more thing to consider: many lenders will reduce the interest rate on an education loan by as much as 2 percent after a borrower makes four years of on-time payments. If you'll be hitting the four-year mark on your student loan payments within the next year, you might be better off keeping your old loans. Weigh your options carefully.

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