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KARA McGUIRE: Student loan consolidation is worth a look

Drew Sandquist looks forward to finishing his master's degree in advocacy and political leadership at the University of Minnesota Duluth. What he's not excited about is what inevitably comes with the end of his scholarly era: Repaying about $50,000 in student loans.

Lenders are eagerly courting 24-year-old Sandquist's business, peppering him with up to 10 offers per week to consolidate his student loans, promising $25 gift certificates just for calling, and $3,000 cash rebates.

But he's wary of the offers. "I'm not sure whether they'll have my best interests in mind," he wrote in an e-mail. That's especially so after all the news about lenders giving improper perks to some colleges in attempts to influence the schools' preferred-lender recommendations.

Former students thinking about consolidating their loans will save a little money if they act before July 1. Earlier this week, the Department of Education announced that after July 1, the rates on variable-rate Stafford loans and parent PLUS loans will increase slightly - from 7.14 percent to 7.22 percent for federal Stafford loans in repayment and from 6.54 percent to 6.62 percent for students still in their grace period (typically the six months following graduation).

Consolidation was the in thing a couple of years ago when rates were at historic lows. Today, consolidation is not the good deal it used to be. Loan rates have doubled, and since last July, federal loans are issued at a fixed 6.8 percent rate. That said, student loan consolidation is still worthy of examination.

Who should consolidate?

- Graduates who want to switch their older, variable-rate loans to a fixed rate. The fixed rate is determined by taking the weighted average of all those loans and rounding it up to the nearest 0.125 percent. Loans can be consolidated only once and rates are relatively high, considering that student-loan interest rates are capped at 8.25 percent. In other words, it's possible that students who consolidate today could miss out on lower rates later.

- Graduates looking for streamlined payments. Consolidation also combines all of your various loan payments into one bill, making it easier to track and pay.

- Graduates in need of payment relief. Consolidation allows stretching out the loan term from the standard 10 years to as many as 30 years, depending on how much you owe. For recent grads with tight budgets, consolidation can reduce the monthly payment significantly. For instance, Mark Kantrowitz, publisher of FinAid.org, said doubling the term to 20 years cuts monthly payments by one-third but doubles the interest you pay over the life of the loan.

Rockne Bergman, a financial aid manager at the University of Minnesota, helps professional-degree students walk through loan issues. He tells students they can always go with the longer-loan term and pay it down aggressively when they can afford to.

As for Drew Sandquist? He expects to be paid well and does not expect his monthly loan payment to break the budget. However, Kantrowitz suggests consolidating a mix of his fixed and variable-rate loans during his grace period to lock in the lowest available rate when he's eligible upon graduation.

Drew should not touch his $2,400 Perkins loan, because it is fixed at 5 percent and has good perks that would be taken away through consolidation.

To find a loan provider, Drew should take advantage of the resources at his college, not sift through the mail. "A school's preferred-lender list is a good start, despite the scandal," Kantrowitz said. Bergman tells students to use a lender that doesn't sell its loans on the secondary market. Otherwise, it can be "hard to keep track of (the loan) and make sure the money gets credited properly," he said.

Students also should shop for good customer service and perks such as interest rate reductions for automatic payments or years of paying on time. Keep in mind that perks attached to non-consolidated loans are sometimes better.

No matter what type of loan, "I recommend borrowers focus on discounts that are immediate in nature and (that) you can't lose," said Kantrowitz, whose research has found that few recent grads manage to pay on time each month, resulting in forfeited benefits.

Student loan consolidation is pretty complicated, and I can only begin to touch the surface of the process. So research, shop around and ask a lot of questions before signing on the dotted line.

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