Archive for August, 2009

Federal Loan Consolidation-Do Not Get In Debt Over Your Head



With the high cost of a college education today, it is no wonder students are relying more on loans than ever before to help them make ends meet, according to the College Board. The good news is that interest rates are currently at record lows of less than 3 percent on the Stafford.

To make smart decisions about borrowing, you still need to plan ahead now and understand your options when it comes time for repayment. Here are some simple guidelines that apply to the major federal loan programs–the Perkins, the Stafford, the PLUS–as well as independent bank loans.


Keep in mind that every dollar you borrow must be repaid, with interest, which can really add up over a 10-year (or longer) repayment term.

It’s easy to think a $200-a-month payment is not a big deal, but those payments can take a big chunk out of your monthly income, and you’re going to need to pay your bills.

To get some idea of how much is too much, you need to estimate how much you’ll be able to pay back once you graduate. That involves estimating your future salary and expenses.

The best way to do this is to use a budgeting calculator available on the Web site of a major lender, such as Bank of America (www.bankof Calculators let you estimate monthly expenses–rent, utilities, food, clothes, car payments, insurance, etc. Then you compare those expenses to your estimated salary. Some calculators provide salary info, or you can find Bureau of Labor Statistics salary averages at By subtracting your estimated expenses from your estimated salary, you can predict how much you can afford in monthly loan payments.


If you do wind up borrowing more than you can afford, you run the risk of defaulting, or failing to pay back your loan according to agreed-upon terms. These terms are specified in a promissory note, a legal document that binds you to make regular payments.

Default usually results after you miss payments for 180 days. Many defaulted loans are sent to collection agencies that may charge costly late fees and take money from your wages. Worst of all, a defaulted loan can haunt you later because it will be recorded as part of your credit history for seven years. Lenders refer to your credit history when you apply for any major loan.

Credit bureaus keep close tabs on delinquencies, says Tom Lustig, vice president and director of marketing at PNC Bank. If lenders see you have a defaulted loan, they may deny you a mortgage, car loan, credit card, or personal loan, or charge a higher interest rate.

Most lenders provide students with charts to help track repayments. Keep in mind: If you can’t make a monthly installment, immediately contact your lender or servicer (the company that owns your loan) to discuss the problem. Plus paying on time has further advantages–many lenders will give about a 1 percent discount to students who make


Knowing the terms of your loan–the conditions by which you have borrowed and are obligated to repay the money–can help you avoid default. But first you should start by understanding some basic loan terms:

Grace period. A period of time–usually lasting six months after you leave college–when many student loans don’t require repayment. After the grace period, a deferment or forbearance can temporarily suspend repayment.

Deferment. A period when a borrower who meets certain criteria may temporarily stop loan payments. Depending on your type of loan, the federal government may pay the interest on it during your deferment period. New borrowers might be eligible for a deferment if they are still enrolled in school half-time or full-time; unemployed; studying in an approved graduate fellowship or rehabilitation program for the disabled; or experiencing economic hardship.

Forbearance. The temporary suspension of repayment in cases of hardship. Anyone with student loans may claim forbearance for six months at a time, for up to a total of three years, but interest still accrues.

Loan consolidation. Combining several loans into one bigger loan from a single lender, which is then used to pay off the balances on the other loans. Consolidation can lower the monthly payments and extend the repayment period to a max of 30 years, but you’ll pay more interest.

Even if you have one loan, it is a good idea to use consolidation to lock in a low rate. It is a fact that lenders offer incentives and interest rate reduction plans, so it pays to shop around.

All in all, loans can be a viable option for paying for college, as long as you borrow within your means and keep up with repayment.

Does Federal Loan Consolidation Help Credit Score?

The answer is yes! The fact is, student loan consolidation does more than reduce your long-term debt; it also helps improve your credit score during the course of the loan. In return, this could help the recent graduate get a better home, car, or better rates on personal loans or credit cards after graduation. Federal student loan consolidation improves your credit score by taking into account the methods that are used by the reporting agencies. For instance, the more open loan accounts you have, the more reports there will be to the credit bureau. And the more open accounts that you have, the lower your credit score will be.

During the course of an academic career, a student will take out as many as 8 loans to help pay for college; one for each semester. Federal loan consolidation helps take these 8 accounts and reduce them into one. Therefore, instead of separate accounts with their own interest and terms of payment, you have only one to worry about. That also means less reporting to the creditors, which in return produces a better credit score. Federal loan consolidation also creates lower payments in the terms of your student loans. When these agencies determine your credit score, they often look at your minimum monthly payments to determine your score. Chances are that with student loan consolidation, you will have a monthly payment smaller than the lump sum of all the old monthly student payments. If so, you are indeed helping your credit score in the positive way.

Finally, when federal student loan consolidation helps your credit to debt ratio. When the credit bureau looks at your debt to credit ratio, they will see less in a consolidated loan. When you have more credit available to you, but less used, then you will almost always have a higher credit score. Thus, these three main points should be reason enough for any student to consolidate their federal loans into one monthly payment. It not only takes the strain off of paying bills, but it also takes the strain off of bad credit.





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