Loan Consolidation

Consolidation – A Money Management Tool                                   
Revised November 2007

Interest rates on variable Direct (Stafford) Loans, effective July 1 2007:

Direct (Stafford) Loan (During Deferment or Grace Period): 6.62 %
Direct (Stafford) Loan (During Repayment): 7.22 %
Plus Loan: 8.02 %

Students still in their grace period, who still have variable interest rate loans (probably never consolidated) might want to consider whether it makes financial sense to lock into the existing interest rate. Variable interest rate loans do automatically increase .60% once their grace period ends. We cannot predict what the rate might be two or three years from now (it could drop again; it is capped at 8.25%). Variable interest rate loans use the 91 day T-bill investment rate as of the last auction in May in the calculation. The rate used May 2007 was 4.92%. As of November 2007, that rate is currently 3.64%.

In the past, there were many reasons why it made sense to consolidate Federal loans. Interest rates were at or near all time lows. Students could lock into a fixed rate while still in school. Some borrowers had federal loans from different lenders, and consolidation was a management tool to combine those federal loans into one repayment. Consolidation does lock you into a fixed interest rate loan; that rate is the weighted average of your existing loans, rounded up.

Also, in some cases, consolidation allows a borrower a longer repayment period, which results in lower monthly payments, but higher total interest paid.

Some students used a handful of companies that also allowed private loan consolidation. Some of those companies no longer allow that option.

Interest rates are changing. It may not be beneficial for you to consolidate your loans immediately following graduation.

Don’t be pressured into consolidating your loans. Some of the companies who do direct mailings regarding loan consolidation disguise themselves to look like the “Federal Government”. You can opt out of credit offers by calling 888-567-8688. You can get on the DO NOT CALL REGISTRY by calling 1-888-382-1222 to get your phone listed so that telemarketers can’t call you. Or online at www.donotcall.gov

As a result of recent congressional action, some companies who offered incentives no longer do, and those who do, admit that a very low percentage of borrowers actually earn those benefits. Many of these companies will sell off these loans, or have them serviced by another company, making it confusing for a borrower ready to make payments.

Things to consider when deciding about loan consolidation:
If you choose to consolidate with a company other than the Department of Education, consider these questions:

1. Who will you be making payments to? Will the company service their own loans? Will they sell these loans to someone else? Have you checked this company out at the Better Business Bureau website www.bbb.org?

2. Will you have a grace period?

3. How many years will your repayment period be? If they use a 15 year repayment period rather than the standard 10-year, your monthly payment will be less but you will pay more in total interest.

4. Does the consolidation company offer borrower benefits? What are they and what percentage of borrowers actually earn these benefits?

5. Will you still be eligible for deferments and what are they? Will you be eligible for forbearance?

6. Do you have a Perkins loan? If you do, you will lose possible cancellation benefits if you consolidate a Perkins loan.

If a student consolidates a Direct Loan with a FFEL lender (any consolidation company other than the Department of Education ) prior to making the first 12 payments on-time, you will be responsible for the up front origination fee rebate of 1.5 %.

Once you consolidate, you will go in repayment within 60 days, so you may want to wait until you’re closer to the end of your grace period, depending on pending interest rate changes.

Once you consolidate, your loan has a fixed percentage rate, and if variable rates decrease, you would not benefit from that decrease. You cannot consolidate again unless you have another Federal loan to add. If you do, they do a weighted average of your existing rates.

Variable interest rate loans during 2007-2008 are 6.62% in school and grace, 7.22% in repayment, but only through June 30, 2008. Loans issued after July 1 2006 are fixed at 6.8%.

Consolidation products for federal loans and private loans have different terms. Usually, if you consolidate private loans, you will pay for the convenience of one monthly payment. Private loan consolidation generally is at a variable interest rate, could have an origination fee and no or very limited deferment options.

Direct Loan borrowers considering Loan Consolidation should contact Direct Consolidation Loans at 800-557-7392 to discuss their personal account and learn how consolidation would affect them, personally. Their website, where you can apply online, is:
www.loanconsolidation.ed.gov

Prepared by Anne Moomey, Clarkson University, SAS
November 6, 2007