Student Loan Consolidation Hot Topics

From Student Loan News, Updates and Blog Posts » Loan Consolidation:

Consolidation is not always the right move for students, yet they do it anyway. I believe the reason for this is because many students assume consolidation is just part of the financial aid process; that consolidation is the final stop on their debt filled journey. The truth, however, is that consolidation is not for everyone.

Read the whole article originally published in: Student Loan News, Updates and Blog Posts » Loan Consolidation.

NO. How bout that? You just read the world’s shortest blog. I may be a man of few words, actually just one word, but my words are even more powerful than the semi-popular teenage alien superhero duo of Zan & Jayna. That’s right, the Wonder Twins! Actually, by boasting about my one word blog I have now far exceeded that loneliest number, darn!

Consolidation is merely shifting your loans from piles A, B, and C and condensing them into pile D. That doesn’t hurt your credit at all, in fact in many cases it helps because your monthly payment is a lot lower after consolidation and your credit report will reflects a Paid status next to each loan involved in the consolidation which adds points to your FICO score.

Now if you were to do a debt settlement where a third party was involved in negotiating your amount of debt down, than that could impact your credit negatively. Instead of a Paid status it would carry a Settled or Settled for Less than Full Balance status.

FICO comes from the Fair Isaac Company, which came up with the process of condensing all of your credit information into one three-digit number.

Three major credit bureaus hold your FICO score; Equifax, TransUnion, and Experian, and each calculate it a little different than the others. Should you wish to dispute a mark on your credit report from one of the three bureaus you can write to them like I have done previously (see below for address information).

Equifax Information Services
P O BOX 740256
Atlanta, GA 30374
800-997-2493

TransUnion
Customer Disclosure Center
Trans Union Consumer Relations
PO Box 2000
Chester, PA 19022-2000
800-888-4213

Experian
NCAC
PO Box 9556
Allen TX 75013
888-397-3742

Your FICO score is used in determining your interest rate, and is even used as a barometer for getting a job. FICO scores range between 300 and 850. Ratings are as follows:

Excellent: Over 750
Very Good: 720 or more
Acceptable: 660 to 720
Uncertain: 620 to 660
Risky: less than 620

The formula used to calculate your FICO score includes information based on several factors:

~ 35% on your payment history
~ 30% on the amount you currently owe lenders
~ 15% on the length of your credit history
~ 10% on the number of new credit accounts you’ve opened or applied for (fewer is better)
~ 10% on the mix of credit accounts you have (mortgages, credit cards, installment loans, etc.)

Now that you know what your FICO score is and how it is calculated you’ll want to work on getting it as high as possible. I’ll be offering some tips in the coming weeks!

For more information about credit or to apply for a credit card (click here).

Consolidation is a great debt management tool. It allows you more time to repay your loan(s). You can generally extend your loan terms out to 25 or 30 years from the initial 10-year marker, which means you can dramatically lower your monthly payment.

Another good thing these days are the lower interest rates. When the economy is slumping interest rates tend to get cut. As a byproduct of these rate cuts (lower interest rates) you the consumer benefit, which is why it’s a great time to consolidate your private student loans.

With one convenient low payment, no prepayment penalties, and lower interest rates it is the perfect time to consolidate.

If you are seeking private loan consolidation (click here).

As 2007 wraps up, make sure you’re taking full advantage of your student loan payments by noting the interest you’ve paid this year on your federal student loans. As long as your income is below a certain level, interest you’ve paid on your student loans is tax deductible on your federal tax return.

If you’ve paid less than $600 in interest, your student loan lender is not legally required to send you a 1098-E form in January for interest you’ve paid. You will need to request it.

Consolidated student loans are eligible for the interest deduction as well.

Consult IRS Publication 970 for details about education tax incentives

I was speaking in the office break room with our director of student loan consolidation, Jon Rudy, about how we’re marketing our federal and private student loan consolidation products. We’re in agreement, as we frequently are, that student loan consolidation has a vital role in the education finance process.

Where I think a lot of student loan companies get hung up is on the idea of saving money for students. Student loan consolidation does not save you money over the long term if you only make the minimum payment, because at the bare minimum payment, you’ll be paying off your loan longer.

Think of it this way. If you rent an apartment, over a period of time, you’ll pay a certain amount for rent. If you rent that apartment longer, it costs you more money. If you rent a smaller apartment for longer, it will still probably cost you more money than a larger apartment for less time.

A loan is nothing more than a money rental. You’re renting money from a lender, and the interest you pay is the rent.

What student loan consolidation does is agree to reduce your rent, trading off with renting the money for a longer period of time, if you make the minimum payment.

Our perspective as a company is that students just out of school need to take a few years to get on their feet in their careers and personal finances. During that time period, a reduced monthly payment is just the thing they need. After a few years, when presumably they’re making good use of their education and degree, we strongly recommend that students step up and make more than the minimum payment, ideally making a payment that’s a little larger than the original, unconsolidated loan payment.

Because there are no early repayment penalties, they can effectively get on their feet financially and then be done with the loan in the same amount of time as if they hadn’t consolidated.

Does student loan consolidation save you money? Not necessarily. Does it reduce your monthly payment? Yes, absolutely. But more than anything else, student loan consolidation helps to buy you some time in the first years after school.

Doesn’t it seem like we were just talking about this? I swear the years go by faster and faster now…

Anyway, for all you students and recent grads out there, the holiday season can be a wallet draining time. In the spirit of saving money, Student Loan Network has pulled together a crafty list of holiday money saving tips and ideas, designed to stretch your hard earned cash a little further this year.

Have any holiday shopping tips or ideas of your own? Feel free to comment back and I will post your ideas (with your permission of course) so others can gain from your knowledge.

Some helpful information about graduated payment plans – the pros and cons.

Most borrowers who consolidate their student loans, do so in order to get some amount of monthly payment relief. While consolidation alone can cut monthly student loan payments nearly in half, a graduated repayment plan can lower that monthly payment even further.

Most graduated payment plans introduce an interest only payment for the first 2 years, followed by standard level repayment for years 3 through end of term. The initial graduated payment can be up to 45% lower then a standard level consolidation repayment plan. Here is a brief example based on a total loan balance of $25,000 at an interest rate of 6.8%:

Monthly payment before consolidation: $287

Consolidated level (standard) repayment: $191

Graduated repayment: $143 (first 2 years) $202 (years 3 – 20)

In this example, the borrower went from paying $287 per month before consolidating, down to $143 after consolidating by utilizing graduated repayment. Keep in mind, the graduated payment plan will significantly lower the initial monthly payment for the first several years, but will increase the total cost of the loan. But for many borrowers who are having trouble making monthly payments, and are at risk of going into default, the graduated repayment plan is a life saver.

Due to recent legislative changes, certain federal student loan consolidation borrower benefits will no longer be offered after October 1, 2007 for any new consolidation loans taken out. These benefits include offers such as interest rate reductions for on-time payments and automatic checking account withdrawal. The changes will not affect any federal consolidation loan that has been completed prior to October 1, 2007. The legislative changes are part of a bill titled “The College Cost Reduction and Access Act (H.R. 2669).”

H.R. 2669 contains provisions aimed to increase Pell grants through 2017, gradually cut federal student loan interest rates in half over the next 5 years, and institute several cuts to lenders and guarantors. Other provisions include Title IV loan forgiveness changes, increases for income protection allowances, and Title VIII Partnership Grants.

Borrower benefits will no longer be available due to the lender and guarantor cuts:

• Elimination of “Exceptional Performer” status which allowed lenders to receive higher insurance rates on defaulted loans
• A reduction in the insurance paid by the federal government for defaulted loans from 98% to 97%
• Reduced amount guarantors may keep when collecting on defaulted loans
• Reduced special allowance payments to lenders
• Increased loan fee lenders must pay to the Department of Education(DOE)
• Decreased account maintenance fees paid by the DOE to guarantors

A full summary of all the provisions contained on H.R. 2669 can be reviewed by visiting:
http://www.nasfaa.org/publications/2007/G2669Summary091007.html

In a nutshell, the above listed cuts will shrink lender profit margins for federal consolidation loans. With the decreased margins, lenders will no longer be able to afford offering borrower benefits. If lenders were to continue offering borrower benefits and discounts after the changes take effect, they would have to take a loss on each funded consolidation loan.

A lot more to come – stay tuned.

I would like to take a moment to welcome Kathy to the Student Loan Network, she joined our group just a few weeks ago. While I could tell you all about her myself, I think her inaugural Blog may be the best way to introduce her.

fundingyourcollegeeducation.blog.com

As always, questions about your student loans – give us a call at 877.328.1565, or check out studentloanconsolidator.com.