Why Consolidate

gr8design

The Sallie Mae rep is both correct and incorrect at the same time. Sallie Mae has no option on the base Federal Rate they quote you. It is calculated by a specific formula called a weighted average. The basic explaination of it as follows, each loan is a certain percentage of the overall loan and that percentage is assigned to each interest rate. When you calculate that total percentage, it is then rounded up to the nearest 1/8 percentile. You can force Sallie Mae to credit any overpayment to principal by so informing them when you send the overpayment in. The payments are lowered by extending the term of the loan. If you owe between 10,000 and 20,000 the maximum term available is 180 months (15 years). By pying less each month, you will actually end up paying more over the life of the loan. If you currently have a mix of both subsidized and unsubsidized loans, then your credit report will show 2 loans, one of each. Sallie Mae is not required to renew any used forebearance or deferment rights that have been used when they are already your current servicer.

All that being said, consolidation is generally a positive. I would suggest though that you wait for at least 6 weeks before doing so. See where the rates are going before locking in a rate. Watch the 91 day Treasury Bill. That will tell you where student loan rates are going.


fla-tan

 

Why would overpayment on the current loans NOT go towards principal reduction???? Where would it go? I've never heard of such a thing.

My preference would be to keep the 4 loans, to give me the flexibility of focusing extra payments on one of the four, and trying to pay it off ASAP, then have the option of rolling that previous payment into paying down the next one. Highest interest first, of course.

Just my two cents.

 

I am doing what youngsterz talked about. I already paid off two accounts by paying the minimum on the other loans and paying more on the account that I want to pay off. I get a lot of satisfaction seeing an account paid off or close to being so. I guess it's a matter of preference. One draw back I can think of not consolidating is when you are late on payments. I have 6 student loan accounts and I only make 1 payment for all of them. When I was late 3 years ago, Nelnet reported it on my 6 accounts. My score took a dive and I am still in the process of getting the negative removed.

 

"Why would overpayment on the current loans NOT go towards principal reduction???? Where would it go? I've never heard of such a thing."

On some SLs, paying extra ONLY goes towards the next payment (which of course includes intrest). (for example, say your payment is $50 and you pay $100, the extra fifty goes to your next payment and does not go to the balance).

 

Student loan rates are set each year on July 1st, so waiting 6 weeks won't matter (find www.ed.gov and search "rates"). FYI, you can save another .25% by having your loans directly debitted from your account.

If you consolidate your old tradelines will say paid due to refinance, or consolidated, depending on the CRA.

It generally won't increase your FICO, to have them paid. You may take a temporary hit due to old and new balances showing simultaneously.

Your student loans now count against your debt to income ratio for buying or refinancing your home, lowering your monthly payment helps you in that respect. Even if it's just a little, take it.

One drawback to conso is once you do it you can't do it again. However, now the rates are the lowest they've ever been. Plus, if you conso through the dept of ed, you have several payment options from which to choose.

 

Re: Re: Why Consolidate

youngsterz

First question answered first. Servicers have the option on Stafford loans of applying any overpayment to future payments rather than principal. And many servicers do just that. They make additional servicing money that way.


There are major flaws in your reasoning on this point. Firstly, unless you consolidate, your interest is variable and can easily go up over time. That will cost you money in the long run. Student loans are simple interest loans so there is never any front loading of interest payments. So consolidating allows you to do the same thing as you want to do with improved results.

Consolidation also has an additional benefit. Over time, it will provide you with an increase in your FICO score. Plus will allow you to allocate additional resources in the manner that you determine is the best use of those resources.


fla-tan

 

Re: Re: Why Consolidate

30ftshadow

You are correct about the rate change date, though you don't need to go to their web site to determine what the change will be. Student loan rates are based on 2 factors. The first factor is the 91 day T-Bill rate on the last auction day in May of each year. The second factor is the spread. The spread is based on when your loans were originally dispersed. Stafford loans dispersed between July 1,1993 and June 30, 1998 have a spread, in repayment of 3.1%. Loans dispersed after July 1, 1998 have a spread, in repayment, of 2.3%.

Consolidation does improve your FICO score over time. While there may be a temproary short term drop due to a new trade line and there may be some overlap showing both old and new trade lines as open, the fact that you have paid off multiple installment loans (and that is how studnet loans are viewed by FICO) will raise your scores.

All servicers and companies that consolidate offer the same various repayment options. They are part of the HEA and are not unique to Direct Loans. Also, several companies offer the same .25% reduction for automatic payments. Plus some offer and additional 1% discount that Direct loans does not. There are other differences in the repayment programs that will allow, for example the servicer that I work with, to save as much as 4 or 5 times as much money as Direct loans can.


fla-tan

 

Re: Re: Why Consolidate

gr8design

The problem with Sallie Mae is that they tend to not release their loans to any other servicer, including Direct loans (dept of ed). There is a clause in the Federal Regs that allow a single servicer, if there is a single lender, not to release their loans for consolidation. Sallie Mae is a servicer that does not release.


fla-tan

 

Re: Re: Re: Why Consolidate

Thanks for the info. It was my understanding that not all would offer the opportunity to change repayment plan after the initial consolidation. Good to know.

Furthermore, I believe the use of the 91 day T-bill rate was a temporary rule for conso loans which application was made between October 1, 1998 and February 1, 1999 (according to section 455 of the HEA). However, my point was that the rate won't change in the next 6 weeks.

However, it seems we agree that consolidation would be a benefit.

 

Re: Re: Re: Re: Why Consolidate

30ftshadow

The 91 day T-Bill is the basis for all Stafford Loans issued after July 1, 1993. And that is not a temporary basis so far. At one time, the 1 year T-Bill was used as the basis for PLUS loans, but after it was discontinued in 2000 or 2001 they, at least temporarily used the 91 day T-Bill for them instead. As yet, to my understanding, the government has not chosen a different base yet for PLUS loans.


fla-tan

 

Re: Re: Why Consolidate

Sounds like you've been checking around for consolidation - any recomendations? I am with Nelnet now, they are offering 5.1% etc... but I have heard of better deals - just want to find a company with a great reputation - thanks scott aka rcoyote@excite.com