Save cash :Time running out to consolidate student loans

Kathleen Pender
Tuesday, June 13, 2006
San Francisco Chronicle

The days of cheap college loans are numbered. Including today, the number is 18.

Starting July 1, the rate on government-guaranteed loans will jump significantly. The new rates apply to Stafford loans, taken out by students, and to Parent Loans for Undergraduate Students, also known as Plus loans.

If you or your child has one or more Stafford or Plus loans that have not been consolidated, you can lock in today's lower rates by converting them to a fixed-rate consolidation loan by June 30.

Also on July 1, the rate on all newly disbursed Stafford and Plus loans will have interest rates that are fixed for the life of the loan. These rates also will be significantly higher than existing rates. If you or your child needs to borrow for the 2006-07 school year or beyond, there is no way to avoid the higher rate on new loans.

Here's the lowdown on how the changes will affect new and existing loans.

Existing loans

Since the late 1990s, Stafford and Plus loans have had variable rates that change once a year, on July 1. The rates are pegged to the three-month Treasury bill yield in late May, which has risen almost 2 percentage points in the past year.

On July 1, the rate for Stafford loans for students who are in school, grace or deferment will rise to from 4.7 percent to 6.54 percent.

The rate for Stafford loans in repayment will go to 7.14 percent from 5.3 percent.

The rate for Plus loans will rise to 7.94 percent from 6.1 percent.

Borrowers can avoid the increase by consolidating one or more of these variable rates loans into a fixed-rate loan before July 1.

The rate on the new consolidation loan will be a weighted average of the rate on the loan or loans being consolidated, rounded up to the nearest one-eighth of a percentage point.

Consolidating is especially important for continuing students. After June 30, students can no longer consolidate Stafford loans while they are still in school.

Consolidating now is even more important for students who are graduating (or leaving school for other reasons) this summer.

Suppose you graduate in June and have one Stafford loan that has not been consolidated. Your rate on this loan is 4.7 percent. If you consolidate by June 30, the rate will be fixed at 4.75 percent for the life of the loan. (That's 4.7 percent rounded up to the nearest eighth.)

Now suppose you are job-hunting or traveling and forget to consolidate until September. You will still be in the six-month grace period students get after leaving school before they enter repayment. But you will have missed the June 30 deadline, so the rate on your consolidation loan will be 6.54 percent rounded up to the nearest eighth, or 6.625 percent.

Now suppose you are really distracted and forget to consolidate until February. You will no longer be in the grace period and will have missed the June 30 deadline, so your rate will be 7.14 percent rounded up to the nearest eighth, or 7.25 percent.

Most advisers are urging borrowers who can consolidate to do so by June 30. The biggest risk of consolidating is that short-term interest rates drop below where they were a year ago -- an unlikely but not impossible scenario.

If that happened, you would have been better off with a variable-rate than a fixed-rate loan. Unlike home mortgages, college loans cannot be refinanced to take advantage of falling rates.

If you have a Stafford or Plus loan, you probably have been inundated with consolidation offers.

If all of your loans are with one private-sector lender, you must give that lender the first chance to consolidate your loans. Most lenders will usually take it.

This so-called single-holder rule applies only to Stafford and Plus loans issued through banks and other private-sector lenders. It does not apply to loans made directly by the federal government under the direct-loan program.

A bill in Congress would repeal the single-lender rule, perhaps this week. If that happens, all borrowers will be able to shop around for a consolidation loan.

In some cases, it could pay to shop.

Although the government sets the maximum rate on Stafford and Plus loans, lenders can charge less. Many offer discounts for setting up automatic payment plans or making a certain number of on-time payments.

If you are disciplined, these discounts can be a good deal, but beware: You could lose the on-time discount if you make a single payment one day late. When you are just out of college and moving around frequently, it's easy to be late once or twice.

There is no fee to consolidate Stafford or Plus loans, so don't be lured by "no-fee" deals.

"Be cautious about direct mail pieces that overly hype how much you can save," says Jim Boyle, president of College Parents of America.

Nancy Coolidge, coordinator of student financial support at the University of California system, says she tells most students who are consolidating to "go back to the people who loaned you the money. It may not be as cheap, but it's quicker. If shopping around causes you to miss the (June 30) deadline, it's a big loss."

Consolidating can backfire if you choose such a long repayment term that you end up paying more in interest, even with a lower rate.

The standard repayment period for Stafford and Plus loans is 10 years, but some consolidation loans can be repaid over as many as 30 years.

If you are afraid your initial salary won't cover your payments, you might consider a graduating repayment option, where "you start off with lower payments and your payment increases over time," says Boyle. "You are placing a bet that your income will rise, so your student loan repayment isn't as painful."

Boyle says he would be wary of "income-contingent" repayment plans, which some lenders offer. They sound good, but you could end up paying interest only, with the unpaid principal being added to your balance.

New loans

After July 1, the rate on all new Stafford loans will be fixed at 6.8 percent for the life of the loan. The rate is the same for students in and out of school.

All new Plus loans will be fixed at 8.5 percent if they come through private-sector lenders or 7.9 percent if they come through the government's direct-loan program. (Schools decide which program they will offer students.)

Apparently, Congress wanted both rates set at 8.5 percent but made a mistake, which could be fixed before July 1.

Although the new fixed rates seem high today, they could look reasonable or even cheap if interest rates continue to climb. And they do have one big advantage over the old variable rates: They're much easier to explain. Let's hope Congress keeps it simple.

https://www.thestudentbox.com/time-running-out-to-consolidate-student-loans-save-cash.php

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Frequently Asked Mortgage Questions:At Mortgage one

Frequently Asked Mortgage Questions

Do you have questions? We can help! You will find the answers to several frequently asked mortgage questions below.


What is the difference between pre-approval and pre-qualification?
When does it make sense to refinance?
What is a rate lock?
What is the difference between a mortgage broker and a lender?
Will I save money going directly to a mortgage lender?
What is a full documented loan?
What are the other types of loans?
What is a good faith estimate?
What is a conforming loan?
What is a jumbo mortgage?
What are points?
What is a pre-qualification?
What is the difference between pre-approval and pre-qualification?

The pre-approval process is much more complete than pre-qualification. For pre-qualification, the loan officer asks you a few questions and provides you with a pre-qual letter. Pre-approval includes all the steps of a full approval, except for the appraisal and title search. Pre-approval can put you in a better negotiating position, much like a cash buyer.



When does it make sense to refinance?

Usually people refinance to save money, either by obtaining a lower interest rate or by reducing the term of the loan. Refinancing is also a way to convert an adjustable loan to a fixed loan or to consolidate debts. The decision to refinance can be difficult, since there are several reasons to refinance. However, if you are looking to save money, try this calculation:

Calculate the total cost of the refinance
Calculate the monthly savings
Divide the total cost of the refinance (#1) by the monthly savings (#2). This is the "break even" time. If you own the house longer than this, you will save money by refinancing.
Since refinancing is a complex topic, consult a mortgage professional.



What is a rate lock?

A rate lock is a contractual agreement between the lender and buyer. There are four components to a rate lock: loan program, interest rate, points, and the length of the lock.



What is the difference between a mortgage broker and a lender?

A mortgage broker counsels you on the loans available from different wholesalers, takes your application, and usually processes the loan which involves putting together the complete file of information about your transaction including the credit report, appraisal, verification of your employment and assets, and so on. When the file is complete, but sometimes sooner, the lender "underwrites" the loan, which means deciding whether or not you are an acceptable risk.



Will I save money going directly to a mortgage lender?

Not necessarily. In fact, if you are a reasonably astute shopper, you will probably do better dealing with a mortgage broker. Mortgage brokers do not add any net cost to the lending process, because they perform functions that would otherwise have to be done by employees of the lender. Furthermore, because mortgage brokers deal with multiple lenders -- in a typical case, 25 to 30, sometimes more -- they can shop for the best terms available on any given day. In addition, they can find the lenders who specialize in various market niches that many other lenders avoid, such as loans to applicants with poor credit ratings, loans to borrowers who do not intend to occupy the property, loans with minimal or no down payment, and so on.



What is a full documented loan?

Both income and assets are disclosed and verified, and income is used in determining the applicant's ability to repay the mortgage. Formal verification requires the borrower's employer to verify employment and the borrower's bank to verify deposits. Alternative documentation, designed to save time, accepts copies of the borrower's original bank statements, W-2s and paycheck stubs.



What are the other types of loans?

Stated income/verified assets: Income is disclosed and the source of the income is verified, but the amount is not verified. Assets are verified, and must meet an adequacy standard such as, for example, 6 months of stated income and 2 months of expected monthly housing expense.

Stated income/stated assets: Both income and assets are disclosed but not verified. However, the source of the borrower's income is verified.

No ratio: Income is disclosed and verified but not used in qualifying the borrower. The standard rule that the borrower's housing expense cannot exceed some specified percent of income, is ignored. Assets are disclosed and verified.

No income: Income is not disclosed, but assets are disclosed and verified, and must meet an adequacy standard.

Stated Assets or No asset verification: Assets are disclosed but not verified, income is disclosed, verified and used to qualify the applicant.

No asset: Assets are not disclosed, but income is disclosed, verified and used to qualify the applicant.
No income/no assets: Neither income nor assets are disclosed.



What is a good faith estimate?

It is the list of settlement charges that the lender is obliged to provide the borrower within three business days of receiving the loan application.



What is a conforming loan?

A loan eligible for purchase by the two major Federal agencies that buy mortgages, Fannie Mae and Freddie Mac.



What is a jumbo mortgage?

A mortgage larger than the maximum eligible for conforming purchase by the two Federal agencies, Fannie Mae and Freddie Mac.



What are points?

It is an upfront cash payment required by the lender as part of the charge for the loan, expressed as a percent of the loan amount; e.g., "2 points" means a charge equal to 2% of the loan balance.



What is a pre-qualification?

This is the process of determining whether a customer has enough cash and sufficient income to meet the qualification requirements set by the lender on a requested loan. A pre-qualification is subject to verification of the information provided by the applicant. A pre-qualification is short of approval because it does not take account of the credit history of the borrower.

mortgageonefinance.com

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Preferred Lenders and Colleges

A lot of attention in the press has been paid over the last two weeks on colleges and their relationships with preferred lenders. Below is an article from the Baltimore Sun that does a nice job of summarizing some of the issues and viewpoints:

N.Y. Probe Casts Doubt on “Preferred” College Lenders
by Eileen Ambrose — Personal Finance

Colleges soon will send out financial aid packages that will include billions of dollars in loans. Before borrowing, many parents and students will check the school’s “preferred lender” list.

But the office of New York Attorney General Andrew M. Cuomo is investigating how these lists are compiled and whether undisclosed financial arrangements are undermining what’s best for families.

Cuomo earlier this month released preliminary findings of an investigation into the $85 billion college-loan industry. And late last week, he announced his intention to sue a California loan provider over accusations of making illegal kickbacks to schools. The company says it plans to defend its business practices.

According to Cuomo, schools don’t disclose how they come up with the preferred lender list, so families are not aware of potential conflicts of interest. Some lenders, for instance, pay kickbacks based on how much business the schools steer to the lender, Cuomo said.

Lenders also have picked up the tab to send college aid officers to ritzy resorts or provided other freebies, he said. And families, he added, are sometimes misled to believe that they must choose a lender from the college’s preferred list.

Financial aid administrators agree that any abuse must be stopped, but they add such problems are rare. Schools develop “preferred lender” lists to help parents and students through the maze of borrowing, they say.

“The marketplace is saturated with options. … It’s hard to sort them all out,” said Ellen Frishberg, director of student financial services at the Johns Hopkins University. “We’ve done a scanning of the marketplace, who’s good at service and who gives good benefits. And now we’re getting in trouble for this.”

Hopkins is in the direct lending program, so students borrow directly from the federal government. The Baltimore university, though, compiled a list of lenders that offer the best rates and service for families seeking parent PLUS loans and private loans, Frishberg said. She said she hasn’t heard from Cuomo’s office.

Hopkins students borrow $50 million from the government each year, and lenders have noticed. Frishberg said lenders have dangled incentives for the school to drop out of direct lending or to put a lender on the preferred list. The university ignores the enticements, she said.

“We have ethics here,” Frishberg said.

Cuomo said he released the early findings so that schools can correct any problems before aid packages go out this spring. His office also published a brochure to help families understand the loan process. It’s available at www.oag.state.ny.us.

Apart from a house, a college education is the biggest purchase that most students and parents will make. Families owe it to themselves to know their rights and make sure they get the best deal.

“Remember not to forget your consumerism. Higher education is a business,” said Kalman A. Chany, author of Paying for College Without Going Broke. Listen to what the colleges say, but do your homework, too, he said.

If the school is in the government’s direct lending program, there’s no choice. Uncle Sam is your lender.

But if you’re attending a school outside the program, your options are numerous.

First, understand that a preferred lender list is only a guide.

“You are not obligated to borrow from a lender that’s on the preferred lender list,” said Mark Kantrowitz, publisher of FinAid, an online provider of student aid information.

Still, a college’s preferred list can be a good place to start your research. Look at all the lenders on the list because discounts and benefits can differ widely among them, Kantrowitz said.

Ask the school how it came up with its preferred list, advised Sarah J. Bauder, director of financial aid at the University of Maryland, College Park.

Selection criteria

The university chose its lenders for their technology, pricing and customer service, Bauder said. For example, lenders waive upfront origination and guarantor fees that can cost a student 2.5 percent of the amount borrowed, she said. The school also selected lenders that have been in the industry for at least 10 years and that keep their loans rather than selling them to another lender. That eliminates confusion and protects loan discounts from being lost, which can happen when loans are sold, she said. (The university adheres to state ethics rules that prohibit the kind of activities noted by Cuomo and hasn’t heard from the attorney general, Bauder said.)

Next, look at what lenders not on the school list offer.

Kantrowitz recommends creating a spreadsheet with the names of the lenders, the discounts and what it takes to earn those benefits. “Focus on the [benefits] you can’t lose and don’t require you to jump through hoops,” he said.

Upfront benefits are more valuable than those on the back end that borrowers might never see, experts agree.

Lenders, for instance, often promise a reduction in the loan’s interest rate after the borrower makes three or four years of on-time payments. Few borrowers can go that long without a tardy payment so most never get the discount.

Upfront discounts vary. Many lenders will lop a quarter-point or half-point off the interest rate upfront if borrowers repay with automatic withdrawals from a bank account.

The Missouri Higher Education Loan Authority, a loan servicer, reduces the rate by 2 percentage points for borrowers making automatic payments on PLUS and Stafford loans. You don’t have to be from Missouri or go to school there to qualify. For a list of lenders the nonprofit works with, go to www.mohela.com.

To check record

To check a lender’s service record, ask your college if it has heard of any complaints. Or, see how lenders treat you when you call. “Are they responsive? Do they answer the phone? How long are you on hold? Ask how many people actually achieve benefits,” Frishberg said.

Your first choice should be federal loans, which are always cheaper than private loans, Kantrowitz said. But if you are going to take out a private loan, check with your school first, he said. “Some schools negotiate with lenders to get a better rate for students,” he said.

And never borrow more than you really need, he said.

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