[Lender] Thanks for Help on Consolidation Info

[Mc Conahay, Pamela K]

I had several helpers respond with info and I used all of it to formulate
this answer to the student:

I'm not an expert on loan consolidation so I asked for some help from lender
colleagues who know more than I. I've used their information to create this
answer:
 
Should You Consolidate?
The first thing I want you to consider is whether you will really qualify
for this lower interest rate that we're all hearing about in the news.  You
mentioned that your current rate is 8% which makes me think you have a fixed
rate loan taken out some time ago.  Be aware that the interest rate on a new
consolidation loan will be the WEIGHTED AVERAGE of your CURRENT interest
rate ROUNDED UP to the nearest 1/8th percent....so you could actually be
increasing your interest rate with a consolidation loan.  

The borrowers who will really "clean up" on consolidation are students whose
loans were made after July 1 1994----their student loans are at a variable
interest rate not to exceed 8.25%.  The variable interest rates have dropped
to an all time low as of July 1, 2002 (4.06% for students in repayment,
3.46% for students who are still in school, in grace period or deferment).
If a borrower has all of his loans at the post 7/1/94 variable rate, he'll
get a weighted average on his consolidation loan based on that 4.06% or
3.46% rate.  That's why these borrowers want to take out a consolidation
loan and lock in the cheap rate.  But, if you don't have any variable rate
loans, you're not going to enjoy any of the benefits of these lower rates if
you consolidate.  

It's critical that you're sure of the current rate of your current loans
before you consider consolidation.  If you aren't sure, check out your loan
record on the National Student Loan Data System (NSLDS) at
http://www.nslds.ed.gov/ or check with your lender.   

If You Decide to Consolidate:
There is no prepayment penalty on any federal educational loan, so you can
always pay the loan off more quickly than required with no penalty. However,
the lender is required to offer you at least a 10 year repayment plan.  For
example, if the standard payment for your loan on a 10 year repayment plan
is $100 per month, the lender can't set your required payment at more than
the $100 unless you ask them to.  

I think you should consider letting your lender set you up on the 10 year
plan and just add additional principal to your payment each month.  If you
ask your lender to set your loan on a 4 year payment schedule, you'll be
REQUIRED to make that higher payment----if you have any financial
difficulty, you'll be stuck.  If you just add on the extra principal
VOLUNTARILY, then you have flexibility if there is ever an occasion when you
can't afford the higher payment. BE SURE TO NOTIFY THE LENDER THAT THE EXTRA
$ YOU ARE SENDING IS TO BE APPLIED TO PRINCIPAL.  (I think they are required
to do this on federal education loans, but from my experience with
commercial lending, it's always a good idea to make sure they know where the
extra should go.) 

Your lender should be able to help you figure out how much you need to pay
each month to hit your 4 year repayment target. Or, any of the loan
calculator sites (like the one at www.finaid.org) can help you calculate a 4
year payout.


Thanks again for all your help!

Pam McConahay
Asst Dir., Compliance & Support Svcs
University of Oklahoma Financial Aid Services
731 Elm, Rm 125, Norman OK 73019-2111
(405) 325-4617, fax (405) 325-7608
pmcconahay at ou.edu