Consolidating Your Student Loans
by Kyle Chin
This summer, Capital Area Asset Builders is pleased to host Kyle Chin as part of the OCA (formerly the Organization of Chinese Americans) internship program. As a college student entering his second year at the University of California, San Diego this fall, Kyle is a natural choice to address a recent e-mail request asking for information on consolidating student loans. Here’s what Kyle learned:
According to the National Center for Education Statistics, nearly half of all current undergraduates are taking out loans to meet the rising costs of college. And if you’re like most students, you probably have multiple loans that bring with them lots of paperwork and bills to keep track of. You may even receive offers to consolidate your loans, but it’s hard to know what to do and who to trust. Help IS available. If you meet some basic requirements you may be eligible for a Federal Consolidation Loan. With a low fixed rate that will not exceed 8.25% and lower monthly payments, Federal Consolidation Loans are a viable option for many borrowers. With the possibility to extend the life of the new loan up to thirty years, you can lower your monthly payments drastically.
First, note that you must have at least one Direct Loan or PLUS Loan in order to qualify for a Federal Consolidation Loan. Second, contact the Direct Loans Origination Center's Consolidation Department (toll-free at 1-800-557-7392) or your lender to find out which Federal Consolidation Loan(s) you are eligible for and which one would best fit your financial situation. A newly consolidated federal loan can be paid back in four different ways depending on how much you want to pay monthly and how far into the future you want to extend your payments (even though longer loan lives equate to higher repayments in the end, you can switch between repayment options at any time). A new federal loan can also be deferred without your principal loan amount increasing or interest accruing depending on your financial circumstances.
With all the contingencies and exceptions, it is best to contact your lender and ask whether you are eligible for a Federal Family Education Loan (FFEL) and/or Direct PLUS Consolidation Loan. Consider some of the following before looking into consolidation:
- How far along are you in paying back your student loans? If you have a substantial portion of your original loan(s) left then consolidation may decrease your monthly payments and the stress of having to pay several different lenders.
- Do you have a plan set up with your current lender that grants you special benefits or rewards? With some loans, like the Perkins loan, there are benefits that will be lost if you choose to get a Federal Consolidation Loan.
- How far into the future do you want to continue paying off your current loans? If you are financially stable enough to stay with your current loans, extending your repayment time to ten or twenty years with a Federal Consolidation Loan may not be the wisest plan.
- Is the extended payment time worth the total cost? Calculate the total repayment you would actually have to pay over an extended period of time – is the extra money spent worth the time? (Online programs can help you calculate this: click “online calculator”)
Go online and check out the available checklists and guidelines to see what is truly in your best interest. Interest rates vary with time, but with a consolidated loan you get to lock in a loan at no higher than 8.25%. The US Department of Education will pay off all your current loans and consolidate them into one low-interest loan with low monthly payments. Check out loanconsolidation.ed.gov for checklists, applications, and an online calculator to get the latest interest rates.
If you are unsure of your current loan status and who is servicing your loan, visit www.nslds.ed.gov. You will need your FSA (Federal Student Aid) PIN and other financial aid information you submitted in your original FAFSA (Free Application for Federal Student Aid). The National Student Loan Data System is a quick and easy guide to your federal loan and grant information. Contact the Direct Loan Origination Center's Consolidation Department or call them toll-free at 1-800-557-7392 for all your questions about consolidation. Paying off your student loans is just one of the first steps towards becoming financially successful after college. You shouldn’t pay more than you need to – find out if consolidation is right for you.
This regular financial column is presented by Capital Area Asset Builders, www.caab.org, a nonprofit organization that helps people of all incomes to improve their financial management skills, increase their savings, and build wealth. Send your questions or ideas for future topics to saving@caab.org.
