Hot deal: Student loan consolidation

[docinthebox]

Here's an extraordinary deal I saw at the other forum (fat ahem wallet) that'll potentially save you a lot of $$, esp. if you have a lot of variable rate student loans (like Stafford loans).

The interest rate of student loans is adjusted once a year on 7/1, based on the 31-day treasury bill rate on the last auction day before 6/1 (which is 5/28/2002 this year), plus 1.7% to 3.1% depending on factors like what year you took out the loan, whether you're still in school, or in repayment already, etc. For the year from 7/01 to 6/02, the interest rate is currently at 5.39% to 6.79%.

Because of the economy, this year, the treasury bill rate has been extremely low, currently at 1.67% for the 91-day rate, compared to 3.7% at the same time last year. What this means is, after 7/1/2002, if you consolidate your loans, you can lock in the interest rate of your student loans at a rate 2% less than last year's rate. If you have $10,000 in student loans outstanding, this means you save $200 in interest per year. If you have $100,000 in loans, you save $2000 per year. And so on. (This is only relative to last year's student loan interest rate. If the economy recovers and the Fed jacks up the interest rate again, you'll still have this low interest rate, which can potentially save you tons of money.)

The latest news is: you don't need to wait till 7/1 to consolidate your loans to take advantage of the lower interest rate. According to the US Department of Education's loan consolidation website, you can go ahead and consolidate today, and still take advantage of the new interest rate that's going to take effect this July. So go onto loan consolidation website and check it out.

I think this is for people who still haven't consolidated their student loans at this time. If you have already consolidated previously, you're out of luck in a way. I think it's hard to get any benefit out of the lower interest rate if you've already consolidated.

For people who can benefit, my advice is, consolidate your loans and choose the longest term repayment option. Then use the money left over each month to pay off the higher rate student loans (eg. institutional loans, which do not qualify for consolidation) as quickly as possible.

 

[bonk102]

wow, this could save me almost 1500 a year in loans, thanks

 

[Shinj1EVA]

I'm confused

Oh well.. I don't have any loans, but sounds interesting. I was thinking about taking out a student loan fall quarter, dunno if this applies in any way. I don't really understand.

 

[Ogewo]

I would also be interested in taking out a student loan for the fall semester. If apply for the loan now can i still get in on this deal? what's the latest i can be accepted for a loan and still consolidate with this web site?

 

[moolman]

Basically,

What's happening is that if you already have stafford loans and you are in repayment, you can lock in your interest rate. Your loan right now is a variable rate so since the rate is so low you should lock it in. That's what they said last year but the rates fell again. Now this year has to be the lowest unless the economy sucks again. You have until next July 1st to lock in the rate. Also if you're still in school forget it because you would go into immediate repayment if you consolidate. And you can't consolidate again.

Alex

 

[randomlinh]

darn it.. i hope the rates are still low 2.5yrs down the road....

 

[MattH056]

Remember, if you consolidate, you will probably lose any chance to put your loans into economic hardship deferment as it is based on the ratio of your loan to your monthly takehome salary. That would mean your loans would go right to repayment. You also pay more over the life of the loan after you consolidate versus having the loans remain unconsolidated.

You also have a limit on Stafford loans of I believe 8.25 as a max interest rate.

MH

 

[greg]

With Grad school and Law school loans I saved $3000 per year when I did this last year. I got locked in at 4.5%. The amount of money I saved while in school last year was $2000 from falling interest rates.

 

[alighieri]

Hmm, this could be very nice. Does anyone know if direct consolidation allows economic hardship forbearance after consolidation. I currently have 205K in medical school/undergrad debt and there is no way that I could even begin to pay interest until residency is over. Joy joy. I saw that MattH056 mentioned that economic hardshiip may not be possible but does anyone have specific site info?

Alighieri

 

[docinthebox]

You also pay more over the life of the loan after you consolidate versus having the loans remain unconsolidated.

Maybe I'm missing something here, but I thought the total amount you pay pretty much depends on the interest rate (variable if you don't consolidate, vs. fixed if you do consolidate), and the number of years you choose to pay the loan off. The mere fact of whether you consolidate or not does not seem to affect the total amount paid over the life of a loan, IMHO. Maybe you can explain more?

 

[SMWinnie]

(DocInThe Box asked MattH056 why the total payments would be higher.)

The consolidation loan stretches payment out over a longer period. For a given loan at a given rate, that means lower payments but more total interest paid.

If that still isn't clicking, imagine that you have a loan outstanding and the bank lets you cut your principal payment in half - doubling the life of the loan. You will be paying interest on a higher balance thereafter.

 

[docinthebox]

The repayment plans are actually the same. There are four to choose from: Standard, Extended, Graduated, or Income Contingent.

( Repayment plans for Direct Consolidation Loan

Repayment plans for Direct Stafford Loan )

I tend to think of consolidation more of just combining all your student loans into one payment, and locking in on an interest rate.

 

[IS300]

Big Question One (especially for people taking leaves of absence or time off):

I'm taking some time off right now from school so I'm paying my student loans.

Part 1: If I consolidate, then go back to college, will I still have to continue paying my previously existing loans WHILE I'm in school (I'm asking because, currently, if I DON'T consolidate, and go back to school, then as long as I'm attending college, the interest on my old loan and my repayment duties will temporarily cease, and resume when I graduate.

Part 2: If I'm going to go back to school for 1 1/2 to 2 years, wouldn't it be better NOT to consolidate?

Part 3: How would the NEW loans (that I get when I go back to school affect this)?


Question Two (BEING PENALIZED by paying more interest):

Since the loans are amortized, we are paying back more of the interest early and less principle in the beginning of the loan repayment period.

From: Repayment plans for Direct Stafford Loan (Posted by docinthebox in the immediately preceding post)

"22. Can I prepay on my loan?

Borrowers may prepay all or part of the unpaid balance on any Direct Loan at any time, without an early repayment penalty. If a borrower makse a payment that exceeds the required monthly payment, the prepayment will be applied first to any charges or collection costs, then to outstanding interest, and last to principal. However, if a borrower's account has no outstanding interest, the prepayment is applied entirely to principal. If the prepayment is twice the borrower's monthly payment, the next payment due date is advanced unless the borrower specifies otherwise. The borrower will be notified of a revised due date."

So if we pay off the loan early, (or make a payment larger than the monthly amount due), aren't we actually BEING PENALIZED? True, they aren't charging us an additional charge for the OPTION to pay it off early. However, at the point where we decide to pay off the loan in full, we have already paid (a portion of the total) interest on the amortized period, haven't we? If we had taken a simple (non-amortized?) bank loan (assuming the same interest rate), wouldn't we have paid much less interest?

Disclaimer: I'm obviously not very familiar with amortizations and loans, so if anyone hear has a clearer understanding of these concepts, and can explain in very simply and using examples (as if you were speaking to a child), I would be indebted to you.

 

[IS300]

This is separate from my previous long post, so that it doesn't get lost in that post (Just as a pre-emptive note to those who might complain, "Why didn't you just edit your previous post instead of posting again!?" ).


Greg:

How did you get locked in at 4.5% last year? According to docinthebox's first post, the interest rates went down even more from last year's lowest rates, right? And,

For the year from 7/01 to 6/02, the interest rate is currently at 5.39% to 6.79%.

I'm not questioning/doubting you, I just want to know how I can get in on this too

 

[SuepaFly]

IS300, Maybe I can help some, I did a lot of research on this and consolidated once when the rates where low, thenthey went even lower and reconsolidated.

When you go back to college, you can get an inschool deferment. It's pretty easy, print out the pdf on their website and have your school fill it out and send it in...But do it fast because deferment begins when they receive proof from the school, not when you started school. Interest will accrue until notification is received.

If you go back to school for 1 and a half to 2 years it DEPENDS on your situation whether or not you should consolidate. If you have quite a few loans from previous years that have an appreciably higher interest rate, then go for it and maybe you can add the first semester to the consolidation too (you can add loans up to 3 months or something like that after consolidation). But if you wait until you are done with school, there is no telling what the economic condition will be at that time. If you believe the economy will be worse then and thus interest rates will be lower (even though it is amazingly low right now) then don't. But if you think it could be appreciably higher, you should consider it.

New loans, as mentioned before, may be added up to 90 days after. Other than that, its just normal...


As for you second BIG question: my friend and I were wondering the same thing not too long ago. But, I can tell you that on the payment slip for your consolidated loans it will have a box on the left that says something like "Check this box if you are paying twice the amount and would like to skip next month's payment..." Something along those lines anyways. That's all I can help you with, because I have yet to answer this question.

Hope this helps.

********************************************************

Big Question One (especially for people taking leaves of absence or time off):

I'm taking some time off right now from school so I'm paying my student loans.

Part 1: If I consolidate, then go back to college, will I still have to continue paying my previously existing loans WHILE I'm in school (I'm asking because, currently, if I DON'T consolidate, and go back to school, then as long as I'm attending college, the interest on my old loan and my repayment duties will temporarily cease, and resume when I graduate.

Part 2: If I'm going to go back to school for 1 1/2 to 2 years, wouldn't it be better NOT to consolidate?

Part 3: How would the NEW loans (that I get when I go back to school affect this)?


Question Two (BEING PENALIZED by paying more interest):

Since the loans are amortized, we are paying back more of the interest early and less principle in the beginning of the loan repayment period.

From: Repayment plans for Direct Stafford Loan (Posted by docinthebox in the immediately preceding post)


Quote

--------------------------------------------------------------------------------
"22. Can I prepay on my loan?

Borrowers may prepay all or part of the unpaid balance on any Direct Loan at any time, without an early repayment penalty. If a borrower makse a payment that exceeds the required monthly payment, the prepayment will be applied first to any charges or collection costs, then to outstanding interest, and last to principal. However, if a borrower's account has no outstanding interest, the prepayment is applied entirely to principal. If the prepayment is twice the borrower's monthly payment, the next payment due date is advanced unless the borrower specifies otherwise. The borrower will be notified of a revised due date."
--------------------------------------------------------------------------------




So if we pay off the loan early, (or make a payment larger than the monthly amount due), aren't we actually BEING PENALIZED? True, they aren't charging us an additional charge for the OPTION to pay it off early. However, at the point where we decide to pay off the loan in full, we have already paid (a portion of the total) interest on the amortized period, haven't we? If we had taken a simple (non-amortized?) bank loan (assuming the same interest rate), wouldn't we have paid much less interest?

Disclaimer: I'm obviously not very familiar with amortizations and loans, so if anyone hear has a clearer understanding of these concepts, and can explain in very simply and using examples (as if you were speaking to a child), I would be indebted to you. :

 

[TheBeast]

I should've waited 1 more year

Greg:

How did you get locked in at 4.5% last year? According to docinthebox's first post, the interest rates went down even more from last year's lowest rates, right? And,

I can't answer for sure for greg, but I'll let you know how I'm locked in at 4.8%. Last year the rates were between 5.39-6.74 ... combined, mine were 5.85%. The fed govt also had an incentive program for consolidating your loans giving you a 0.8% interest rate reduction if you make your first 12 payment on time and a 0.25% reduction for using automatic withdrawal from a bank account. 5.85-0.8-0.25=4.8.

So if we pay off the loan early, (or make a payment larger than the monthly amount due), aren't we actually BEING PENALIZED? True, they aren't charging us an additional charge for the OPTION to pay it off early. However, at the point where we decide to pay off the loan in full, we have already paid (a portion of the total) interest on the amortized period, haven't we? If we had taken a simple (non-amortized?) bank loan (assuming the same interest rate), wouldn't we have paid much less interest?

No you are not being penalized. Every loan you will ever have has an ammortization schedule (meaning a minimum payment will be calculated based upon the current length of the loan and current interest rate of the loan in order to be able to have the loan fully paid for at the end of the term of the loan). Any large loan taken out and paid back over a significant period of time will have you paying much more towards interest than prinicple in the early years. On a side note, if you can find me a bank willing to give you a several thousand dollar loan at a fixed interest rate between 3.39%-4.79%, please, let me know. IMHO paying off a student loan faster than required when you have the money borrowed at that low of an interest rate is insane. Invest the amount you would put towards paying off the loan and get an average return over the life of the loan of 7-8% and you're clearing 4%.

 

[IS300]

Thank you, really, SuepaFly and TheBeast. Those kinds of explanations are what make my proud to be a member of the AT Hot Deals forum.

SuepaFly - If you consolidate your loans, does affect the deferment of the same loans? I might have (incorrectly) heard that if you consolidate, then when you re-enroll in college, you cannot defer interest and/or payments for THOSE consolidated loans?

 

[Logloglog]

My question -- for the gurus on this topic -- If I consolidate, do I still get to claim the tax deduction next year (and following years)? I checked the IRS site and consolidation site, and it's not explicit in either location that I can see. This is the only downside I see -- if the deduction was wiped out. Any assistance would be great

 

[wizz0bang]

Hmmm... I got a card in the mail from the direct loan program saying I can consolidate at 4.25% (taking into account my .25% deduction for direct withdrawl). But I just graduated and am going into the Peace Corps. I can defer my loans without accruing interest at present (I have William D. Ford direct subsidized loans at variable interest and a Perkins loan at fixed 5%). Can I consolodate, lock in this amazingly low rate... then defer without interest while in the Peace Corps for two years? The direct loan page seems ambiguous about this...

Thanks...

 

[dshodson]

wizz

i have the same question as u
im not sure if u can remain in subsidized defferment after consolidating
im in the military and have one year left where uncle sam pays the intrest
im thinking of waiting till about this time next year and consolidating since the variable rates should be lower and this consolidation rate should not change until may again

D

 

[TheBeast]

IS300,

If you consolidate your loans, does affect the deferment of the same loans? I might have (incorrectly) heard that if you consolidate, then when you re-enroll in college, you cannot defer interest and/or payments for THOSE consolidated loans?

Consolidated loans are no different than your regular school loans besides the fact that the interest rate is fixed for the life of the loan. If you are in school, you can defer the loan just like any other school loan. The only difference is that when your consolidation is completed, you will need to fill out the deferment form letting the gov't know that you are still in school.

Logloglog,

If I consolidate, do I still get to claim the tax deduction next year (and following years)?

See my answer above. Yes, you still get to claim the tax deduction (but fortunately or unfortunately depending how you look at it, your school loan interest paid is going to be less due to the lower interest rate, so less deduction)

wizz0bang,

I'm not 100% sure on this one, but I believe that you will lose the government subsidized interest payment after consolidating even when your loan is deferred. What you should take a look at, though, is how much is that subsidized amount over 1-2 years, and will the amount of interest you accumulate over that time be less $$ than a 1 or 2% interest rate increase over the life of the loan. If (big if) the interest rate stays the same or drops over the next year (highly unlikely IMHO) you are better off waiting on the consolidation. If the interest rate goes up, however (much more likely), you will be hurt by not subsidizing now. (ie, owe an extra $100 or $200 now, or instead pay several hundred or thousands over the life of the loan)

 

[Wingnut]

Considering I got ripped out of my 1100.00 income tax check this year...this seems mighty nice!!!

THANX!

 

[MattH056]

alighieri:

I have med school debt now and the financial aid officers that spoke with me said economic hardship forbearances will probably not be eligible because of the ratio of the monthly payment to your salary.

My advice: Use your three years of forbearance, then consolidate if you get a good rate.

MH

 

[dshodson]

if not mistaken we have till this time next year to lock in at the same rate no matter what the t-bill does between now and then

so if u have a subsidized deferment it might be better to wait several months before consolidating

D

 

[Logloglog]

Rock on to TheBeast -- thanks for the info