I’m trying to help my girlfriend do some financial planning for how to handle her student loans from grad school, and it looks like things have changed (substantially) since I had to handle my own (undergrad) loans from a few years ago.
She has Grad Plus loans, subsidized and unsubsidized Stafford loans, and a private loan. She’s trying to decide if there’s a good reason to consolidate, and what kind of repayment plan to choose.
It looks to me like both the Grad Plus and the Stafford loans are fixed rate loans. So, my first question is whether there is any benefit to consolidation? As far as I know the main benefit of consolidating student loans is that, previously, they were variable rate, and consolidation let you lock into a fixed rate loan.
Second, there are many graduated repayment programs that let you pay less early on and then after 2-5 years increase the payments. On my consolidated student loans, I know that the extended repayment options revert back to a variable interest rate. Will that be the same for her current loans? Would it be that way if she consolidated and then went for extended repayment?
She has called both the school financial aid office and her lenders, and they’ve told her a variety of vaguely conflicting things, some stuff that’s clearly correct, and some stuff that seems incorrect to me. Personally, I don’t trust the people who answer the phones at Sallie Mae. In my own experience, I spoke to several people who didn’t really know what they were talking about, so I’d love to find a definitive answer that’s, say, on a Dept. of Ed website, or in some known place on her promisory notes.
When I consolidated, I had mostly federal loans and a couple of private ones (like 15% private). My interest rate was around 8% across all loans. When I consolidated, the rate was 4%, but only for the government loans. They also wanted a repayment term of 30 years. That’s fine with me, I pay back at the original 10 year rate. As for the private loans, I also had some outstanding credit card debt accumulated as a poor-ass clerk, and my new (at the time) Saab. My mom’s credit union got me a new car loan rate of 6% which I used to pay off my Saab, credit card debt and student loans. The car loan was actually a personal loan, now that I think about it. Anyway, the Saab loan was originally 5%, so in retrospect, I should’ve not included that. The student loan rates are floating, and think are above 7.125 right now, so I save some money there (especially since I owed more in student loans than for my car). And, my cc rate was 14%, so that was a no-brainer. The only difficult part was that the payment term was 5 years. However, I really did enjoy writing only one check and only having one account statement to analyze every month.
I consolidated mine with the gummint-- they were able to grab all of my loans and stick them in a package which at the time got me a fixed rate, 3% (which I consider better than inflation-- it was technically 3.25 but because I made the first 12 payments on time they knocked a chunk off)). I like only having one loan to worry about, and they’ve been very fair and sane, and the graduated plan (hey, humanities grad. . .) is very nice. I have it set up to automatically make the required payment each month, so that’s nice too. And while I’m not the best patriot, I trust the US Department of Education more than I trust Sally Mae et al.
I recommend consolidating. My wife did and the percentages went from like 6% and something else down to 2.89%. That’s probably less than inflation, and definitely less than my house payment, so it was a good move. The downside - I think you can only consolidate and lock in a loan once, so make sure rates are where you want them. The second downside - if you are married you assume her debt when you consolidate, and would be responsible for it even if she defaulted, passed away, etc.
I guess I don’t understand how the consolidation loans work.
When I consolidated my undergrad loans, the rate I got was just the weighted average of all my loans. So the only benefit was locking in a fixed rate.
However, y’all are telling me that you can actually reduce your rate by consolidation. And my girlfriend recently called the Federal Student Aid people to inquire about consolidation, and the rate they told her is less than the rate on any one of her loans.
My suspicion is that what you are missing is that the interest rate offered to people consolidating loans is based partially on the interest rates on the loans being consolidated, partially based on the interest rates on loans being offered at the time of consolidation, and partially based on what interest rates have done over the last 6 months and are expected to do in the future.
If interest rates rose over the period of time between when your first loan was issued and the time when you sought consolidation, the banks/government/whoever had little incentive to offer you a lower interest rate, and so they didn’t, just a weighted average. If interest rates had dropped, they might have offered you a lower interest rate.
I am not well enough informed about consolidation or the history of interest rates to know for sure if this is what is going on.
You should have like a ton of mail telling you to consolidate. It looks like those are government loans, so they should be offering you a consolidation of whatever the current interest rate is (or maybe some formula as outlined by **Eureka/b]) but for a period of like 30 years. If your loans are lower than the consolidation rate, which is possible if you recently graduated, then it won’t make any sense to consolidate. I only experienced the averaging of loan rates for my private loans, and they wanted something like a 2.5% origination fee. Yeah, no thanks.
Thanks Eureka, that makes a lot of sense. I did graduate with variable-rate federal loans at a time when the rates were incredibly low, so it makes sense that there wasn’t a possible lower loan to consolidate to.
It looks like the FSA offer my girlfriend has is at 6.7% fixed, which isn’t bad. It’s definitely less than her current rates (average of about 1% more than that) are.