College loan consolidation can be a good deal

Family finances: College loan consolidation can be a good deal
Friday, May 12, 2006

By Alan Lavine and Gail Liberman

If your son or daughter has adjustable-rate college loans and they're getting ready to graduate, they likely are being enticed to consolidate them before July 1.

Consolidate by June 30 into one lower-rate fixed-rate loan and many say you should be able to save an enormous amount of money.

"It's a good deal as long as you understand what the down sides are," said Thomas Ball, director of financial aid at Saint Vincent College, Latrobe.

By July 1, many experts are predicting the rate for those who have outstanding Stafford loans could rise as high as 7 percent. Lock in earlier, and some lenders are dangling fixed rates as low as 4.50 percent. Plus, you get a single monthly payment.

The fixed interest rate typically is determined by taking the weighted average of the interest rates on your student loans, rounded up to the nearest one-eighth percent or .125 percent.

But student loan consolidation programs vary, based on a number of factors, and, as with any loan, you need to probe for the terms before you swallow the bait.

In general, we have to admit, we're a bit leery of debt consolidation.

Reason: It frequently extends the term of your loan. If you're not careful, this can increase your debt -- even though your interest rate is lower.

However, in these days of rising interest rates, and particularly, if it will be tough paying your monthly bills, loan consolidation definitely is worth considering.

"Most students are not in a financial position to be able to keep a 10-year term, which is the maximum term for a Stafford loan," Mr. Ball said. "If the variable rate Stafford cap [rate limit] is 8.25 percent and you consolidate at 6 percent, great! Except, if you extend the term from 10 to 20 years, it's going to cost you more in the long run."

Make certain you understand the total cost of your loan under the new plan vs. your potential cost under existing programs.

If you decide to consolidate, always check the impact that debt consolidation may have on the six-month grace period you have before you must repay the loan.

Typically, you have six months after you graduate before your first loan payment is due. The problem is that once you consolidate, depending upon the type of loan you have, you could be required to start repayment immediately.

Frequently you can get around this problem if you talk with your lender in advance, Mr. Ball said. "If you send in your application now, they sometimes can hold off dispersing the loan so you don't forfeit your grace period."

Also, be careful which lender you choose. "Make certain it's reputable, has been in business for a while and can deliver on the incentives" it promises, he warned.

In recent years, according to Mr. Ball, a flurry of private company intermediaries have come on the market. "They're in business to do a loan and sell it as quickly as they can," he said. You need to make certain they have the resources to back up their promises for the entire term of the loan.

To avert any chance that an intermediary might not be able to deliver on promises, he suggests checking with your current lender first about consolidation.

If you do decide to consolidate through a third party, be certain you've checked the party out thoroughly with the Better Business Bureau, state regulatory authority and Web sites such as www.ripoffreport.com.

If both students and parents have loans, Mr. Ball said, don't necessarily expect to combine a parent and student loan into one. Reason: Loans with different Social Security numbers can't be consolidated. In some circumstances a parent, though, may be able to arrange to take control of both loans and consolidate.






In our column last week on finding good financial deals, we slightly overstated the annual percentage yield on GMAC Bank's one-year CD. Based on Bankrate.com data, the yield should have been 5.30 percent.