Consolidating Your Student Loans – and Why You Should Before July 2006

If you’re fresh out of college (or almost), be it from technical, undergrad or grad school, chances are you have thousands of dollars in loans that will soon send the creditors to your front door. And if you’re anything like me, you have several different loans from several different lenders. If that’s the case, you’re eligible to consolidate through government-regulated federal loans or through private loans – and you should do soon. The rush is because there’s a bill about to pass which will have a negative effect on your interest rates by this coming July – but more on that later.

After spending my life under my parents’ financial care, followed by a few years at college in a virtual responsibility “bubble,” I had some trouble understanding exactly what loan consolidation meant and why it’s so important. This article should help clear up at least a few of the questions you’re struggling with.

Your education loan lender (or lenders) issued at least one (and probably several) loans in your name. The two most common types of loans are Subsidized Federal Stafford and Unsubsidized Federal Stafford Loans. While you’re in school, the Unsubsidized Loans begin to accrue interest – meaning that they take a percent of the total amount, and add that percentage to your principal monthly. The principal is the original amount of money borrowed, without interest. The loans work like a credit card balance – the longer you wait to pay it off, the higher the amount you owe climbs. If you get Subsidized Loans, they don’t begin collecting interest until after your grace period ends.

What’s a grace period? It’s the time immediately after your graduation (generally it lasts six months) that the lender allows you to get on your feet before they begin to bill you. This time is awarded so that you can (hopefully) find a job and begin to save. In other words, your grace period is the last few months of blissful ignorance. During this time, your Unsubsidized Loans will continue to accrue interest, but your Subsidized Loans will not. If you’re not sure about your specific loan, you should contact your lender.

My grace period is rapidly ending, so I’m on to my next step – consolidating. Consolidation means that you take all of your separate, small loans and bundle them into big one loan. This means that instead of having four or five bills to pay each month, you’ll only have one – and the payments are generally lower.

Consolidation also helps you maintain a better credit score. Instead of your credit report reflecting five different outstanding debts, it will show only one, albeit a little (or most likely, a lot) larger. Additionally, most consolidation loans offer all types of incentives to help you manage your debt and lower your interest rate. Consider savings like .25% off your interest for signing up for automatic debit payments, or 1% off your rate for three years of on-time payments. These incentives vary by the institution you choose to work with.

This talk of interest rates leads me to why you should consolidate ASAP. According to the representative I spoke with at Nelnet, the company I used to consolidate, there is a bill pending approval (and most likely will be passed) that will no longer allow you to “lock in” a fixed interest rate. If this bill if passed, then beginning on July 1, 2006, interest rates will be variable only.

What’s the difference? Right now, if you consolidate, you’re guaranteed to keep one interest rate throughout the life of your loan – which can be short if you’re rich, or very long if needed, and tend to be around fifteen to twenty years. Interest rates change all the time, and generally, like gas prices, they increase. So someone that consolidated last year for, let’s say, 3.25%, is guaranteed that rate for the term of their loan, even if the going rate is 8.5%.

Currently, rates are around 4.75%. This means that when I consolidated, I got that percentage minus whatever incentives the company was offering – and that rate is guaranteed. But if the bill is passed, anyone who consolidates after July 1, 2006 will have to watch their rates vary from month to month – and climb over time – so that in the end, they will pay much more in interest. This is extremely important for everyone who isn’t graduating until next year or later.

If you’re graduating this coming May, you should consolidate immediately to lock in a fixed rate. Don’t worry; they will honor your full grace period, so you’ll still have six months after graduation before reality punches you in the face. But definitely consolidate before you lose your shot at a fixed rate.

In addition to money-saving incentives, there are also many payment plans to choose from, so you can pick the one that best fits your schedule and budget. There is the standard repayment plan, which offers the highest monthly payment but you will accrue the least in interest and end up paying a lower total amount. If you’re unable to make the high standard monthly payment, there are options for graduated repayment plans, which start at an affordable, low monthly rate and gradually increase each year or so. The specifics vary by company.

There are also income-sensitive plans, which base your monthly payment on your income, so you keep within your budget. These plans also cause you to pay more in interest over the years, but may be a good option for those of you who aren’t making all that much just yet. You’ll need to submit some recent pay stubs, which will help the company decide on a comfortable amount to bill you.

I know what you’re thinking (yes, I’m psychic, too) – what happens if I sign up for a lesser monthly amount and can afford to pay more as I move up the career ladder? Or maybe you’re a pessimist thinking the other way around. Either way, most lenders work with you to adapt your plan as needed, as long as you continue to make your payments on time. And there are no prepayment penalties, so if your monthly bill is $97 and you feel that you can afford to pay $125 one month, go ahead. This will help you cut down on your total interest.

Choosing a lender is important because you’ll need to be able to establish a working relationship with them. Also, as I’ve already mentioned, they may be able to save you money. I’ve heard lots of positive reviews for Nelnet, so I chose to work with them. Upon my first phone call, they were courteous, thorough, helpful, and friendly.

But they’re far from the only choice – which makes deciding so overwhelming! Wachovia, PNC Bank, and probably most major banks offer their own consolidation loans. Sallie Mae, American Education Services (AES), NextStudent, and Collegiate Funding Service (CFS) are just a few other options. I’d also recommend doing your own Google search, as there are plenty of choices to investigate. I’ve listed some links as resources to help you get started.

So remember: Conosolidate your loans to help save money and headaches. While it seems a little intimidating at first, it’s not hard to do once you understand the basic terms and conditions. And if at all possible, consolidate BEFORE July of 2006, as rates will probably be taking a hit, and you won’t want to be effected by it. You have to pay them off anyway, so you may as well do it in the easiest and most affordable way possible.

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