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  Consolidating Student Loans

The mass media often shows a very a bleak picture of economy. In such a situation, college students who are trying to pay off their loans are being increasingly burdened by  education loans. The Los Angeles Times, recently, reported that the nation's four-year public colleges increased tuition fees by nearly 10% this year, the steepest rise in more than a decade. These conditions coupled with shrinking endowments and less money available as gifts from the private sectors have created an increased reliance on the federally guaranteed student loans.

When a student is looking forward to his graduation that promises good careers, independence and a new beginning, the repayment of loans burden him, threatening to overshadow all other priorities of life. Repayment of loan can be daunting for some students and their parents. The recent analysis by the Public Interest Research Group (PIRG), the average debt among students is approximately over $16500. According to the Associated Press, graduates of public universities and colleges owe more than $10000 for their undergraduate years, while graduates for private schools owe $14000. Graduate level students often owe more than $24000, while those studying medicine or law accumulate even more debt.

It becomes imperative to seek a solution to the impending question as to how a student can repay these ever-increasing sizeable loans. Federally guaranteed student loans are traditionally issued at variable rate loans with a repayment term of 10 years. This arrangement sometime contributes to the problem. In many instances, students who have not even secured employment but their loan repayments are scheduled to commence.

Students have the option to consolidate their federal educational loans by locking in at current interest rates. By doing so, students get the best possible interest rates, reduce the additional amount they will pay in the future and have the convenience of single payment each month. In 1965, the federal government passed an act known as Student Assistance Act, which helps the student with large amount of loan to extend the terms for a longer period of time may be to the extent of 30 years based on the balance. This solution lowers the students' monthly payments but the interest rates are accumulated for a longer period thereby increasing the total amount due at the end of the period. This act also enabled the students to combine many loans or several disbursements into one loan, thus creeping in the concept of Loan Consolidation.

Student should be a graduate in order to opt for loan consolidation. This consolidation process must be started early. It is better to start at the time when the student is a fresher or sophomore. Consolidation would lock federal education loans at 3.46% and any loans the students take there after would be subject to change of annual interest rate. As the interest rate changes, the students' final consolidation rate will be calculated based on weighted average for the various rates they have paid. The students who take the consolidation advantage are given the opportunity to avail only once unless and until they omit a loan from this process or they acquire additional loans after their original consolidation. Consolidation brings in the enjoyment of paying only once as compared to several payments. The interest is to be determined by a formula provided by the federal government. The ability to fix the interest rate is of particular importance in the present economic climate. Interest rates for student loans are now at a 38-year low, so students should lock in the historical low rates, which can never go back to the previous high of 8.25% in June 2000.

Though the rates are fixed by federal government, many lenders offer special incentives to good customers. Some offer discounts if the students allow the lender to automatically withdraw the payments from the bank account. Others offer additional incentives as a reward for timely payments.

Students are also free to pay back the loans by performing community services under different government programs. It is not right for every loan to be consolidated, people holding Perkins Loans should investigate the possibilities of having their loans forgiven.

Before proceeding for consolidation, one must considers many options available depending upon their background and future plans.

• Students must not consolidate loans if they are eligible for loan repayment after graduation, as such action will make the repayment option void.

• Students stand to forfeit the six-month grace period, if they consolidate their loans, before they start the payments after graduation.

• It will be wise to wait until the fifth month of the grace period to consolidate loans, if the students are not sure of their post graduation plans.

It is good for the students to collect as much information as possible, from the loan market so that they can stay abreast with the latest developments. The students are advised to take information about loan consolidation process from the following sources:

• American Collegiate Financial Services
  www.onestudentloan.com
  (866) 291-0852

• Sallie Mae
  www.salliemae.com
  (888) 272-5543

• U.S. Department of Education
  www.ed.gov
  (800) 433-3243

Other useful links

Financial Aid Online Credit Information

Repaying Debt By The Defaulter