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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

Caroline has already gone over some details of the FAFSA for beginners, but what about those of you who filed a FAFSA (Free Application For Federal Student Aid)  last year?

You need to complete a FAFSA every year you're in school, even if your financial situation hasn't changed. Don't worry — renewing your FAFSA takes much less time than the initial application.

The Department of Education will send you a Renewal Application or a reminder of your PIN (Personal Identification Number) to apply online, and you may also get a reminder from your school. However, you don't have to wait for either notification to apply. If you need a reminder of your PIN, just head to the PIN Website. 

And while it's best to file your taxes early to have the correct information, you don't have to wait. Use December pay stubs to estimate income for the year. You'll have the opportunity to correct your application if needed. Plus, applying earlier ensures you meet your deadlines  (some aid is first come, first served).

If your situation has changed — like a dramatic shift in your income, a divorce, or a parent's job loss — you may want to talk with your financial aid office about how it could affect your financial aid award. They'll be able to walk you through what may be different this year.

Once you've applied for federal aid, keep on applying. Seek free money like scholarships and grants.  Even though you may receive enough financial aid to cover your costs, you don't have to accept everything you are offered. Some aid, like unsubsidized Federal Stafford Loans, will need to be repaid with interest — so the more funding you find that doesn't have to be repaid, the better!

Staci

Happy 2009! Have you made any New Year's resolutions? 

I'm not a particularly successful resolution-keeper. Last year, I vowed to eat healthier, and for six weeks it was nothing but oatmeal for breakfast, salads for lunch, and Lean Cuisine®  for dinner. By the time Valentine's Day rolled around, I felt so deprived that I consumed a two-pound box of See's Candies®  in one sitting.

All bets — and subsequently, all resolutions — were off.

Looking back on it, I know my resolution was too general — not to mention highly unrealistic! I'm guessing that many resolution-makers find themselves in similar situations.

Depending on what stage you are in your student life — soon-to-be-student, current student, recent graduate — here are a couple of specific, achievable New Year's resolutions you could adopt in 2009:

1. Apply for at least one scholarship. Remember, free money for college means less money you'll have to borrow, and plenty of scholarships are out there for those willing to do a little work. Find one that's right for you by checking with your high school guidance counselor, your college financial aid office, your employer (or your parents' employer), or a scholarship search.

2. Before you apply, read the fine print. Know exactly what you're getting into before you sign a credit card application or a student loan promissory note, because your signature indicates that you agree to the terms and conditions. Pay attention to interest rates, fees, grace periods, and repayment periods. If you don't understand anything, ask — before you sign.

3. Make an extra student loan payment. Student loans don't have prepayment penalties. At least once this year, scrounge up enough cash to throw an extra $50 at one of your student loans, preferably the one with the highest interest rate. Just be sure to communicate with your lender and let them know exactly which loan you want the extra payment applied to.

My one resolution for 2009? Not to eat an entire box of See's Candies in one sitting. Sounds pretty doable, right?

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?

Staci

Last week I was talking with a friend of mine who is still paying off his student loans from graduate school. Like he does with his car loan and his mortgage, he pays more than the minimum amount. The extra money goes toward the principal (the balance owed on the loan), which means he pays the loan off faster and with less interest . If this is something you can afford, I highly recommend it, especially since student loans don't have a prepayment penalty .

However, my friend's student loan servicer was recently purchased by another company, and now he's dealing with a different billing system.

Before, he used a loan coupon book  and mailed in his more-than-the-minimum payment every month. When he called the new company to ask about payment options, the representative looked at his account and said, "You're paid ahead through April, so you don't have to make any payments until then."

Then he asked for a bill, and the representative explained that he wouldn't be receiving one until his next payment was due — in April.

To be fair, I suppose most student loan companies aren't used to their customers inquiring about paying more and paying in advance!

What I recommended to my friend is that he set up a recurring automatic payment for his student loan through his checking account.

When he balked, I told him to think of automatic payments as an "electronic coupon book."  That way, he won't have to rely on receiving a bill — he can just take matters into his own hands. Plus, he'll be saving paper and stamps!

What works best for you to stay ahead — or at least on top of — your student loan payments?

Staci

Not long ago I read an article that made me cringe: A graduate student at California State University, Northridge  decided to put her tuition on a credit card.

On her credit card? With all the other options out there? [Gasp.]

Although Jennifer didn't put her tuition on her credit card, she did charge some of her living expenses, which left her in a bit of a bind. Here's the final part of her story.

Mistake #3. Living on Credit — Not Taking out Enough Money in Loans to Cover Living Expenses

When I went away to college, my mother made a deal with me. She would give me an allowance of $200 every two weeks for living expenses (basically all she could afford). She also got me a credit card. Six years later, we still have the same deal and the same credit card.

When I took out loans, I only borrowed enough money to cover tuition costs and my rent. As it turns out, that $200 every two weeks hasn't been enough to live on, and I now have a standing balance on my credit card that I can't pay off.. Very recently a wise financial advisor pointed out to me that the nearly 18% interest rate that I pay on my credit card balance exceeds the interest rate of my student loans. Neither my mother nor I thought that it might be a good idea to budget living expenses into my student loans even though she's encouraged me to keep putting the larger, unusual purchases on my credit card.

Now that we've learned out lesson, my credit card will be paid off this fall before I start my new grad program. I've taken out extra money for my living expenses and I'm going to try something new once I'm established at school: My credit card is going in the pencil box that I bury in the bottom of my desk drawer, and I plan to withdraw a budgeted amount of cash every week.  The objective will be to live “cash to mouth,” or to make the cash last the whole week, without running out — groceries, coffee, everything. Any extra cash will go into a reward fund that I will utilize at graduation, one year from this September.

While the economy is increasingly digital, and more merchants can handle small $2.00 coffee transactions digitally, stick to cash because it's tangible. It's easier to see how the coffee adds up when you're making change and not just handing over a thin slab of plastic.

How many times have I heard that little gem of wisdom before? Lots. But there's no teacher like experience.

Jennifer's right — there's no teacher like experience. But perhaps the mistakes she made (or almost made) can help you avoid some financial pitfalls of your own.

Want to tell your student loan story? Have any wisdom to share about your own financial experiences? Send us an email — we'd love to hear from you!

Staci

Generally, Wells Fargo recommends that students exhaust all of their "free money" (such as grants and scholarships) first, then borrow federal student loans, and if they need additional funds, consider private student loans .

Graduate student Jennifer weighs the pros and cons of that borrowing strategy in her next segment.

Mistake #2: Not Considering a Private Loan over a Federal PLUS Loan for Graduate Students

When taking out my loan for grad school, I decided that I had better do my research this time. As a grad student, I now qualify for federally subsidized loans. Stafford loans only go so far, and to finance the shortfall, my options are either a Federal PLUS Loan for graduate students or a private loan. A Federal PLUS Loan for graduate students has a fixed interest rate, so of course, this is the best option. But is it really?

The terms for the two loans differ: PLUS loans have a ten-year repayment term, which can be extended with broad deferment options (including one that covers insufficient salary), and a fixed government rate of 8.5%. Private loans have a longer repayment term — up to 25 years depending upon the lender — and relatively narrower deferment options. The interest rate on private loans is based on the Prime Rate  (which is the federal funds rate plus 300 basis points, or 3%), plus a margin (one or more percentage points) based on your credit history.

Now, here's the kicker: for a private loan, the Prime Rate, plus a percentage point or two, may yield an interest rate lower than the Federal PLUS Loan if you have a good credit history. However, choosing a private loan is a gamble. The economy is currently in pretty bad shape, and the Fed has been keeping interest rates low, but inflation is also a risk — it may lead to the Fed raising interest rates in the future. The Prime Rate has ranged from 4 to 9.5% since 2000 and currently sits at 5%. Banks calculate the applicable Prime Rate differently. For example, banks can use the monthly average, yearly average, or the rate on the final day of each month. If you're going to go with the private loan, make certain that you know how your lender will calculate the interest rate.

A private loan may be the way to go if your career path is more certain and you have a good idea of what your salary will be upon graduation — i.e., you don't actually need the longer repayment term, and you can repay the loan sooner before economic conditions change too drastically and take advantage of a relatively certain lower rate of interest. But again, this is a gamble. It might be smarter to go with a Federal PLUS loan if you tend to procrastinate or think that you'll need to utilize the relatively broader repayment deferment options.

Ultimately, it comes down to this: You have to do what's best for your own financial situation, and what might work for one student might be completely wrong for another. So do as Jennifer did — if you need to take out a student loan, weigh your options, weigh your individual tolerance for risk, and after educating yourself, borrow accordingly.

We'll have Jennifer's last piece of advice on Thursday.

Staci

As we commemorate the second anniversary of the Student LoanDown — how can it be two years already? — I'm reminded of why we started blogging in the first place: To have a conversation about education financing.

Although we bloggers tell you about our experiences, it's really your experiences that resonate loudly and clearly with this community. And recently we were fortunate enough to get some great real-life experience from Jennifer, an American student about to begin graduate work at the the School of Oriental and African Studies  in London.

So for the next couple of days, I thought I'd share Jennifer's advice with all of you. It's a slightly different perspective from ours, which is what blogging's all about.

My parents were fantastic financial planners. They saved enough money to almost entirely pay for my entire undergraduate education, which was fortunate because they also made too much money for me to qualify for federal loans.

I did have to take out a couple of private education loans as an undergraduate for the summer course I took in Geneva and the month I spent doing volunteer work in Brazil. When I began to apply for loans, having already taken Intro to Microeconomics , I figured that the student loan market was probably homogenous because every bank offers student loans. How different can they be?

Plenty different, let me tell you. Thus, I would like to offer "The Three Mistakes I Made (or Almost Made) Financing My Education."

Mistake #1: Not Reading the Fine Print

Know the details of your loan. Before you sign the loan, read the fine print. I'll bet you're thinking, "Oh brilliant advice, everyone knows that you're supposed to read over the details of a loan before you sign it!" But seriously, how many people actually read the fine print, those tiny little details in seven-point font that appear in a new PDF window and go on for about six pages?

I didn't. Brilliant financial planner that I am, I was usually applying for loans after classes started, in an hour between classes, after I'd received the notice from Student Financial Services telling me that I owed the school money. I chose my lender based upon the lender my roommate at the time was using. I hate filling out loan applications because it feels as though the amount is always large and relatively abstract — while I theoretically know the value of $49,000 (the cost of 1 Masters of Science degree , also a year's salary, the cost of a luxury car, etc.), the reality of that large an amount of money remains relatively unfathomable. The possibility that I will ever earn a salary high enough to pay it back seems unreal. Even the meager $10,000s I needed sporadically as an undergrad felt relatively daunting and thus, I avoided loan applications until they became absolutely pressing.

The reality of the situation is that taking out loans requires comparative research. The first undergraduate loan I took out required repayment upon completion of my BA, regardless of whether or not I was continuing my education at the graduate level — something that I was in no position to do.

Select your private loan company carefully. Some loans allow repayment to begin before graduation, some charge an "origination fee," others do neither. It is a good idea to check the student loan options at the bank you keep a checking account with, as some banks offer post-graduation interest rate reductions for current customers. Consider opening a checking account with a bank just for the interest rate reduction; a lot of students relocate to a new city and have to open a checking account anyway, so check out which banks operate where you go to school. Many banks offer checking account applications over the internet, so you can apply before you leave home with plenty of time to apply for an education loan.

For a helpful guide to the different types of loans and their terms, check out Mapping Your Future , and for extra financial planning fun, click on the "play Show Me the Future" link on the left side of the screen.

Next week we'll be back with Parts 2 and 3 of Jennifer's financial aid life lessons. Stay tuned!

Staci

Some of the comments we've been receiving as of late—and I haven't been able to publish them all because they don't meet our Comment Guidelines—indicate that the Student LoanDown blog hasn't been spending enough time discussing student loans.

I'm not going to argue with that—we have diversified our content a bit this summer, adding new bloggers and broadening our topics. But here's what I would argue: that we're here to talk with you about financing college and managing debt, and that includes much more than just student loans.

These days, what I hear from so many young people is that their student loans feel like Monopoly®  money—abstract, unreal amounts with no consequences attached. That they're not even sure how much they owe. That they have no idea how they'll pay it back. Wait, you mean I have to pay it back?

Earlier this week I read an article quoting a 22-year-old college grad who said something along the lines of "we're too young to understand that we're going to owe this much" and that "it doesn't feel real until later."

I don't want to be judgmental here, but it's this kind of attitude that frustrates me. You're not too young to grasp the concepts of borrowing—you're just not doing it.

That's why we discuss the broader topics of debt and credit and wants and needs and budgeting and saving on a "student loan blog." We share our personal experiences for the same reason. If we can get any of these financial concepts to resonate with you in any way, we will have built a better educated, more responsible community of past, present and future student loan borrowers.

Because, my friends, it's not Monopoly money—it's as real as it's ever going to be. So do not pass Go, do not collect an unnecessary $200 at 6.80% interest, and, above all, do not claim ignorance. You're old enough to know.

Dinna

At the risk of sounding like a total nerd, I've never had an issue with debt and have always had good credit. Somehow, Mom and Dad got the message through to live within my means and pay off debts quickly.

Maybe it was because I saw my parents living simply, budgeting their money, balancing their checkbook, and not buying many of the big-ticket luxuries that their friends were indulging in. I can remember hearing my father say to my mother, "When you see me driving around a Mercedes , I won't be worrying about making payments." I guess I took that to heart and didn't want to worry about making payments, either.

I was the older of two kids from immigrant parents and grew up in a middle-class neighborhood. My dad was in the Navy , and my mom worked in the banking industry. My parents bought their first home when I was about 10 years old, and my mom managed the household finances.

When I was old enough, Mom gave me money management “training wheels” by putting me on her credit card account. But she didn't just hand the card to me without instructions—she taught me the basics like credit limits, balances, minimum payments, and payment due dates. And, while I didn't completely understand its value at the time, she emphasized how proud she was of her good credit rating . She said that I should try to build my own good credit by paying back my debts and always paying on time.

Now that I work in the credit card industry, I recognize the value of these lessons. And, from talking to friends, I've learned how uncommon it is for parents to give their kids the basic financial guidance I was lucky enough to get. By the time I got a credit card in my own name, I understood that each purchase I made was actually a little loan that needed to be paid back—so I really thought long and hard before using it.

Thanks to my folks, when I ventured out on my own I did so with a good credit history. This signaled to lenders that I was a good risk to buy a car or to rent an apartment. I was surprised to learn that even employers were interested in my credit rating. And, when it came time to buy a house of my own, I was able to qualify for a mortgage with a lower interest rate, which saved me a considerable amount of money.

What money management lessons—good or bad—have you learned? And who have been your teachers?

Editor's note: Please welcome Dinna as the newest member of the Student LoanDown blog team!