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Barbara

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One of the questions we Student LoanDown bloggers get asked frequently (through comments and our Ask the Expert tool) is, "Can I lower my student loan interest rate?"

Some folks are looking to lower their monthly payment because they're not able to afford it — others are just looking to decrease the total interest paid to their lender. Here's the information I usually pass on to those readers.

When student loan borrowers sign their promissory note  agreeing to pay back the loan, they also agree to the interest rate detailed in the contract. For some loans this will be fixed and for others it will be variable (a margin that is added to a base rate). For federal student loans made after July 1, 2006, the interest rate is fixed. Most private student loans have variable interest rates.

Your promissory note locks in the terms on your loan (including the interest rate or rate margin). You can't "refinance" a student loan the way you can with other consumer credit products, but there are options to possibly lower your current monthly payment, reduce your interest rate, or reduce the amount you pay over the life of the loan.

Quick tangent: For those of you still in school or just beginning to take out student loans, be proactive. Understand what you're borrowing at what rate, so you don't find yourself unable to make payments later. End tangent.

Now, let's talk about the options.

Consolidate: By consolidating your student loans, you may end up reducing your current monthly payment because you are likely extending your repayment period. However, that means you would end up paying more over the life of the loan if you continue paying just the required amount each month. But if you're looking for a little payment relief now and are willing to pay more (or make higher payments later to avoid accruing additional interest), consolidation could be the answer. Your best bet for federal student loan consolidation is through the Department of Education's Direct Loan Program. 

An added benefit of private student loan consolidation is a possible interest rate change. If your credit situation has improved since you took out your loan (or if you bring on a cosigner), you may qualify for a better interest rate than you previously had.

Pay off the debt: Some borrowers could consider using a different consumer loan (personal, home equity, etc., depending on assets) to pay off their student loan. This option has a couple big things to consider, though. You would lose several benefits of student loans like deferment and forbearance options, as well as the potential tax deduction.

Pay more: If what you're looking to do is accrue less interest, then the best solution is to pay more money each month toward your principal balance. Even just a little bit each month could add up to big savings over the life of your loan.

Get the debt forgiven: There are some programs that will forgive a certain amount of a student's debt. For example, there is a federal loan forgiveness option available to students working in public service. 

Use borrower benefits: Ask you lender if they offer any benefits that could reduce your interest rate. For example, some lenders offer a discount if you make your payment automatically.

What other questions do you have about your student loans?

Barbara

Recent grads, have you made your first student loan payment?

If not, it's coming. The six-month grace period of Federal Stafford Loans is ending for May graduates, which means it's time to repay.

Here are a few ideas to start your repayment off the right way:

1. Pay on time. One of the best things you can do to build your credit history and stay on good terms with your lender is to make on-time payments. Stay on top of due dates by managing your loan online. You can even make it simpler by signing up for automatic payments.

2. Pay more. A little extra can go a long way when it comes to saving money over time. Each dollar you pay in addition to your minimum payment means one less dollar to pay interest on. The savings can really add up.

3. Consolidate. If you want to make one student loan payment to one lender instead of several, you can consolidate your federal student loans through the government  and private student loans through lenders like Wells Fargo. Plus, there's an added bonus to private student loan consolidation: You may qualify for a better rate than you had on previous loans if your situation has changed.

4. Talk with your lender. We know some borrowers may have trouble repaying. The important thing is that you talk to your lender about your options. You may qualify for a deferment or forbearance. Or you may be able to pay on an income-sensitive, graduated, or extended schedule.

For those of you already repaying your student loans, what tips do you have on starting repayment on the right foot?

Barbara

Right now, student loan consolidation may be on the minds of many student loan borrowers. If you graduated in May, your loans are probably coming out of their grace period right about now. Some of you may already have made your first payment.

I received an email question recently about consolidation—specifically, if borrowers would be better off waiting to consolidate their loans—and I wanted to share my response with all the Student LoanDown readers. The short answer is: It depends.

If you’re just entering repayment on your student loans, it’s likely some of the loans are variable-rate federal loans. The rate of these loans is adjusted annually each July 1  based on the 91-day T-bill rate. If you’re a borrower with these loans, it’s possible your rate may go down in July.

Remember, the rate on a consolidation loan is based on the weighted average of your current interest rates rounded up to the nearest one-eighth of a percent. Lower interest rates on variable loans could mean a lower consolidation loan interest rate.

So, should you wait?

There are a number of reasons you may decide to consolidate your loans, and many variables play into whether consolidation is the right choice. It depends on what you’re hoping to accomplish by consolidating:

• If you’re looking to reduce your monthly payment by consolidating, chances are your monthly payments might be more than you can handle. If that’s the case, you would likely benefit more from an immediate ease on your monthly cash flow. Otherwise you’d still have to make those higher payments each month until the July rate change.
• If you want to lock in your rate by consolidating—which is more of a factor for those with a large amount of variable rate loans—it could be beneficial to wait until July. Right now variable interest rate Federal Stafford Loans are at 7.22% during repayment. It is possible that next July variable interest rate loans might be lower, but there is no guarantee. There’s always the chance that the rate might not decrease.

For some borrowers, consolidation may not be the right option at all:

• Depending on your interest rate and loan balance, it might not make sense to consolidate. For example, if you have a large amount of debt at one interest rate and a smaller portion of debt at a higher rate, it might not be the best choice to combine those debts. You could be paying a higher interest rate in the long run on a portion of the balance that originally had a lower rate.
• Another option to consider in lieu of consolidation is an extended repayment plan. This option is generally available if you have more than $30,000 in student debt through the Federal Family Education Loan Program (FFELP) . With extended repayment, your monthly payment would decrease without having to take out a new loan.

So that’s the skinny on waiting to consolidate. Any questions?

Kathy

It's August, which means that it's tuition time for the many of us heading back to school.

*GULP*

Over the next few weeks, the loans I am borrowing will be disbursed to my university to pay off the tuition and fees I owe as I continue my education. Once I have settled my bill with the school, the remaining funds will be deposited into my bank account in a ceremony I affectionately refer to as "Student Loan Payday."

Let's face it, getting a degree is expensive, and many of us need to borrow money just to cover our cost of living. Here in the San Francisco Bay Area , that burden is especially high. I am eagerly awaiting the additional money in the bank so I know I'll be able cover all of my expenses for the next few months!

The kicker about "Student Loan Payday" is that it only comes about once a semester, which means you have to figure out how to make those funds last. Creating a budget—and sticking to it—is crucial to making that happen!

What tips do you have to help stretch your student loan dollars?

Barbara

After July 1, you'll have an even bigger reason to apply for federal aid—increased Federal Stafford Loan  limits.

In case you need a couple of reminders why it's a good idea to max out your federal funding before turning to private loans, check out some discussions we've had earlier on this blog.

• They're guaranteed: What's so special about federal loans?
• Almost everyone qualifies for some kind of aid: Is financial aid for you?
• They can be consolidated: Raising my hand with consolidation questions

I know you're wondering how much you could be able to borrow. So, see the chart below with the new Stafford Loan limits for dependent and independent students.

Remember two things:

1. An independent student is someone who meets one of these criteria:

• A graduate or professional student
• A married person
• An individual with legal dependent(s) other than a spouse
• A veteran of the U.S. Armed Forces
• An orphan or a ward of the court
• At least 24 years old by December 31 of the award year
• Deemed independent by the school's Financial Aid Office due to special circumstances

2. A subsidized Stafford Loan:

• Is need based
• Means any interest that accrues during school or deferment paid by the government

Barbara

I'm a sucker for breaking the awkward silence. If a professor waited long enough after asking a question in college, I would always pipe up. Well, if I kind of knew the answer.

I asked y'all for questions about student loan consolidation, and so far you haven't asked any! Well, the awkward silence is getting to me—so I'm going to raise my hand and ask (as well as answer) questions that I've been asked in the past.

What exactly is consolidation?

Consolidating means taking out one new student loan that combines your other student loans. Your consolidation loan lender will pay off the loans you are combining, so you'll have one new loan for the total amount. BTW, when people talk about student loan consolidation, they're usually referring to federal loan consolidation. Some lenders also offer options for private loan consolidation.

Am I eligible?

If you have federal student loans—no matter which lender holds them—you can consolidate them with any lender. Here are the federal loans that I'm talking about:

• Federal Family Education Loan Program loans (Stafford, PLUS, SLS, and Consolidation Loans)
• Federal Direct Loan Program loans (Stafford, PLUS, and Consolidation Loans)
• Federal Insured Student Loans (FISL)
• Federal Perkins Loans
• Health Professions Student Loans (HPSL)
• Nursing Student Loans (NSL)

And yes, you read that right. If you already have a federal consolidation loan and take out another federal loan (say you go back to school after a couple years to get a master's degree), you can "reconsolidate" and add more federal loans.

You can also consolidate a single Federal Stafford or Federal PLUS loan if you want to lock in the rate.

Why should I consolidate?

Consolidation offers a couple key benefits:

• You might see a lower payment each month—which can help when you're trying to manage other monthly payments while paying back your loan.
  
  
• Instead of making several payments, you'll only have to make one.
  
  
• Your loan will have a fixed interest rate—this is a big one, especially if you have variable-rate federal loans. The next questions tell you why.

What kind of rate will I get?

For federal loan consolidation the rate is an average of the rates on all the loans you are consolidating, rounded to the nearest one-eighth of a percent. But it won't get higher than 8.25%. Speaking of rates …

When should I consolidate?

This is an important question right now because students with variable-rate federal loans will see an interest-rate increase on July 1, 2007. If you have a federal loan that was issued before July 1, 2006, you're in this boat. These loans also increase by 0.60% when your grace period ends, so it's better to consolidate while in grace.

Why shouldn't I consolidate?

In some situations, there may be a better option to ease your loan repayment—like different payment options.

Also, you need to be aware of the disadvantages of consolidation. Since you might be extending your repayment term, you could end up paying more interest in the long run. And, it's possible you might lose any borrower benefits you've been reaping on your loans.

Here's a good checklist  that walks you through your decision.

What else should I know about consolidation?

• You can't "unconsolidate" your loans. Once you consolidate, your old loans don't exist anymore—your consolidation lender paid them off.
  
  
• Until your lender tells you your consolidation is complete, you need to continue making payments on all your separate loans.

OK, now that the silence is broken, is there anything else that you're wondering? If so, raise your hand.

Barbara

That is the question … on a lot of graduates' minds this time of year.

Most May graduates are in a grace period on their federal loans right now—and their decision to consolidate  their student loans should be made before their grace period ends if they have federal loans made before July 1, 2006. (Those loans have variable interest rates, while those made after that date have fixed interest rates.)

So, now is the time to ask questions about consolidation. What is it you're curious about? I'll have answers to all your burning consolidation questions in an upcoming post.

Caroline

If you're about to graduate from college, congratulations! And, if you've taken out student loans , guess what?

You have a new best friend.

If you took out federal loans , you may have already been through an "exit counseling"  session. That's where they tell you all about your rights (blah, blah, blah) and responsibilities (blah, blah, blah) as a student loan borrower.

With the excitement of graduation looming, you may have only heard "blah, blah, blah" during this session. But your responsibilities as a borrower are important. So let me boil them down to one easy-to-remember rule: Treat your student loan lender like your new best friend.

Got it?

Now let me break it down a little further …

• When you make a life change, you tell your friends. Well, since your lender is your new best friend, remember to tell them when you change your name, when you move to a new address, change your Social Security number, or if your school status changes.
  
  
• If you're in trouble, you tell a friend, right? If you're having problems making your student loan payments, tell your lender—don't hide from them. Your lender can help you work out a payment plan and avoid default .
  
  
• You wouldn't borrow money from a friend and try to get out of repaying it. You can't do it to your student loan lender either. You HAVE TO repay your loan as agreed. No exceptions if you didn't finish school, didn't like your major, can't find a job, yada, yada, yada.
  
  
• If your friends can't get  hold of you for a few days, you don't ditch them. Same with your lender—if you don't get your bill, YOU STILL HAVE TO PAY IT. There's no "get a free month" if your bill doesn't arrive for whatever reason.
  
  
• You go to your friends' parties. Consider entrance and exit counseling sessions less-than-exciting parties given by a great friend. You gotta go.
  
  
• You read texts, emails and IMs from your friends. You new friend will probably get in touch with you in a more traditional way—like through the mail . But you're required to open and read everything your lender sends you. So, hello mailbox!
  
  
• For better or worse, relationships change. Learn about your consolidation and refinancing options—these could be good things for you. But you also have to know what will happen if things go south in your relationship with your lender—as in, if you default. (Don't do it, it's so not good.)



• Know how to reach your friends. This is Friendship 101—you KNOW their phone numbers, addresses, etc.  Same with your lender—be sure you know where to send payments and written correspondence.