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10 Things Every Student Loan Borrower Needs to Know

1. What's happening with student loan rates?

The interest rate on Stafford loans increased for the first time in five years, on July 1, 2005. This is the country's main source of student loan funds. These loans were at record low rates last year -- 3.37 percent. Graduates who acted quickly were able to lock in that low rate, by consolidating their student loans by June 30, 2005. The rate is now 5.3 percent for students repaying their student loans. That rock-bottom interest rate only applied to Stafford loans disbursed after July 1, 1998.

2. What is a federal consolidation loan?

With a federal consolidation loan, your lender pays off the balances of all the loans you choose to consolidate and then issues you a new loan. A consolidation loan may lower your monthly loan payments by as much as 50 percent and it can also lengthen your repayment period.

3. How do you calculate the interest rate on a consolidation loan?

The interest rate on a federal consolidation loan is determined by taking the weighted average of interest rates on the federal education loans you have and rounding up to the nearest one-eighth of a percentage point, capped at 8.25 percent. The interest rate varies from borrower to borrower, but averages from 2.875 percent to 4.25 percent.

4. Is a consolidation loan right for me? How much money can I save?

Find out by contacting your student loan lenders. Ask plenty of questions and be as specific as possible.

5. Where can I find out more about consolidation loans?

Information, applications and calculators for consolidation loans are available on the Sallie Mae, Collegiate Funding Services, and College Loan Corporation and NelNet Web sites. Information on consolidation loans from the U.S. government is available on the U.S. Department of Education Web site.

6. How can I get a discount on a consolidation loan?

Some lenders will reduce the interest rate on a consolidation loan by a quarter percent when you sign up to have your monthly loan payment debited from a checking or savings account. A lender may also knock down your interest rate by 1 percent after you make 48 consecutive on-time payments. Be sure to ask about discounts when shopping for a consolidation loan.

7. Should I consolidate now, or wait?

The rock-bottom interest rates on federal student loans were in effect only through June 30, 2005. But anyone with a heap of student loan debt may still want to check out a federal consolidation loan if they're interested in making their monthly payments more manageable. Smaller payments when you're just getting started in your career might help to keep your budget from getting squeezed too tight. Remember that after grads leave school, there's a six-month grace period before their loan payments begin.

8. I consolidated once before, may I do it again?

No. Once you consolidate your loans there's no going back. You're stuck paying the rate you locked in on your old consolidation loan. The only exception would be if you decide to go back to school and take out additional loans. You would then have the option of combining your new loans and your old consolidation loan into a brand-new consolidation loan.

9. I'm still in school, how can I cash in on lower interest rates on student loans?

You already are. The rate on Stafford loans for borrowers that are still in school (or in grace) is 4.70 percent as of July 2005 and will stay there through June 30, 2006. Students with unsubsidized Stafford loans will pay less interest in the 2005-2006 school year and owe less money upon graduation. Students with subsidized Stafford loans do not pay interest on loans while they're in school.

10. Follow these steps to consolidate.

Technically, obtaining a consolidation while still in school is a multi-step process, says Martha Holler, spokeswoman for student loan provider Sallie Mae. But loan providers often handle all or most of the steps as one transaction. And under the new reading of the rules, students can start the process with a phone call, says Holler. It used to require written notification. Holler explains how it works: First, the student asks to repay the loan. Reason: Unless the loan is in "repayment" status, it doesn't qualify for consolidation. Next, the student asks for a deferment until graduation, which is automatically extended if the student is in school more than halftime. Then, the student applies for consolidation. Last, she signs a promissory note to repay the loan starting immediately after graduation, she says. Just how late students can submit applications for consolidation depends a lot on the lender and the complexity of their applications. Some lenders, such Sallie Mae, have Web sites that allow students to complete and submit applications online.

11. How do Student Loans effect my Credit?

Many times, student loans are listed on your credit report in triplicate. What does this mean? With any type of loan that you owe, you will be shown the maximum credit, the outstanding balance and your payment history. The total amount of outstanding balances of your loan will be taken into consideration by the credit scores. FICO states that a large student loan balance may in fact lower your score. With student loans, however, it is a little bit more complicated than that. Student loans almost always report to your credit score in triplicate. If you only have $15,000 in student loan debt, your credit score will show as if you owed three times as much, $45,000! This will not only greatly lower your credit score but it will also have a huge impact on the interest that you have to pay.

Student loans with longer repayment periods lower your score. Student loans that takes 10 years or more to pay off will more than likely, lower your credit score. Many times, it will report to the credit bureaus as “too long to pay off a debt”. The best thing to do is make sure to pay your student loans off earlier if possible, but definitely make sure you pay ON TIME. Missed payments and/or Loan Defaults will significantly lower your credit score

Defaulting on a Student loan has serious consequences. The Department of Education, guaranty agencies, and lenders are required to send information about you to credit bureau organizations. They must supply information about the total amount of loans extended, the remaining balance, and the date of default if you are in default. They supply information concerning collection of the loan, repayment status and the date the loan is fully repaid or discharged by reason of death, bankruptcy, or disability. Keep in mind, that even most private lenders report to credit bureaus. If you default, your loan will be listed as a current debt that is in default. The default will also be listed in the historical section of your credit report, specifying the length of the default. If you repay the debt in full, the debt will no longer be listed as a current debt in default, but it will still be listed on your report for up to seven years. Perkins Loan defaults can be reported indefinitely.

Student Loan Consolidation can increase your credit score. Consolidating your student loan will put all your loans together and is wholly paid up by your consolidation lenders. One single loan will then be assigned to you. With this one single loan only, you can improve your credit score. Consolidating your student loans will be a great start for you to create a better financial standing and it will help putting back your credit score in the right track. Many efficient and effective lending companies online offer great consolidation program options.

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