Tuesday, September 11, 2012

How do I consolidate my student loans?

This is an unclear and scary subject for most people exiting college and being thrown into the woes of the work force. I say woes because after my first 4 months on my first job out of school I was laid off - that is hardly fair - but I survived even with my loans on my back.

The Debt you Earned
If you were like me when you were in college you probably racked up a nice chunk of change in student loans because you had no choice. The government told you that your parents were supposed to contribute an impossible amount of money to your education and when you showed your parents your EFC they just laughed at you. So while you were in school, every semester you took out more loans, those loans were never consolidated because of faulty reasoning in my opinion, but hey, beggars can't be choosers. Those loans were all accruing interest with the exception of your Federal Subsidized loans if you had any. Do not be fooled though Subsidized loans begin to accrue interest as soon as you reach your repayment period after your 6 month grace period.

The Shocker
Now you are out of college and it is time to pay back. What's this? An unspeakable amount of money you are expected to pay every month after your 6 month grace period?! Oh jimeney Christmas! You knew you had to pay, but not this much!

Consolidation to the Rescue
Well that is where consolidation comes into play. You really don't want to pay off 10 or 20 small loans, you want to pay off 1 or 2 consolidated big loans. Why not just 1 loan? Ah, you see that would be too easy, there are different loan types that prevent that from being a reality, which in my opinion doesn't make much sense depending on the loan.

Loan Types and Consolidation
As you will quickly learn, the different types of loans that you have can or cannot be consolidated. The basic rule seems that Loans of the same type can be consolidated and nothing more.
  • Private Education loans cannot be consolidated together with Federal Loans - this makes sense to me. I have a Private Education loan that has a variable interest rate, it cannot be consolidated together with my fixed rate Federal Loans. The main reason (I think) they can't be consolidated is because one of my loans was from the Private sector and the others are from the Public sector.
  • Federal Subsidized loans cannot be consolidated together with Federal Unsubsidized loans - this makes little to no sense to me. Both my Subsidized and Unsubsidized loans have the same interest rate and are both Federal loans, in my opinion they should be consolidated, but they aren't, even though my Subsidized loan is now accruing interest just like my Unsubsidized loan. Why not just consolidate them then? No idea why they don't...
Unfortunately sense plays no part here, now it is time to pay back your borrowed money - that's all that is clear.

Interest Rates
As mentioned before, you can have different types of Interest Rates, there are two main types:
  • Fixed Rate - Fixed Rate loans have the same interest all year until they are recalculated. They can be changed when Ben Bernake farts or when congress hates you because they think cutting spending really means to raise rates on people repaying their student loans.
  • Variable Rate - These rates fluctuate often, the recalculation depends on your loan, but most of the time it is quarterly (I need to verify this). Usually these are the worst kind, but right now, since the US economy has the pulse of a Clam - you can actually rejoice a little - your interest rates are probably lower than the Federal Rates as of right now (09/11/2012) and they have been like that for a while. However, when the economy is revitalized expect your rates to shoot back up, but there is luckily a cap on how high they can go.
Okay... So How do I Consolidate my Loans?
You can attempt to go to a variety of places for your student loan consolidation. For example you can try to consolidate your loans with the people you have your loan with. However prepare yourself for them to possibly stonewall you and say something to the effect of, "We are not accepting any new applications for Loan Consolidation at this time.", which is a banks way of saying, "Sit and Spin". I had this happen to me with Sallie Mae, therefore I will shamelessly say, NEVER USE SALLIE MAE THEY SUCK. So I found myself in this predicament until I found only one place on the face on the planet that would consolidate my loans and they are named "Direct Loans" or at least they were, they recently changed their name to EdFinancial. I highly recommend EdFinancial for your Federal Loans, they do not take Private Loans, but do not fear there is another company that you can use for your Private Education Loans named American Education Services. Truth be told I didn't actually seek AES out, they found me and bought my loan from JP Morgan Chase because, just like Sallie Mae told me to sit and spin, JP Morgan Chase had me at an alarming 11% variable interest rate.

Recap: People you can consolidate with and what for
  • EdFinancial - http://www.edfinancial.com - they will mostly take your Federal Loans ONLY - They will NOT take Private Education Loans.
  • American Education Services (AES) - http://www.aessuccess.org/ - they will take your Private Loans and possibly others.
I trust both of those companies because they are Government run or backed.

My Real Federal Loan Example
I took my 10 or so small loans from Sallie Mae which was a monthly payment of $425 at a different interest rate per loan over to what was known as Direct Loans at the time and they consolidated me down into two Loans, both at 6% initially. I was then paying $230 per month. Big $195 dollar difference there huh? If you sign up for automatic bill pay, it drops the interest down to 5.75% which is indeed significant (-0.25%). I now have two main Loans, one Subsidized and one Unsubsidized, but don't be fooled by the names they both accrue interest. The government just refuses to consolidate them together even though they have the same interest rate...

My Real Private Education Loan Example
So I didn't actually refinance this loan myself, it was done for me without my permission, but you know what - I am very glad it happened. AES lowered my interest rate from a horrific 11% down to 4.00-4.25%. It does fluctuate, but not too much.

Pay Off Strategies
If you are capable of doing so, enroll in the aggressive payoff schedule. This means your payments are higher, but you pay off more principal each month. You want to attack your principal as much as possible. If you go for the lowest payment you not only have more payments up until the end of your scheduled loan Payment Period (10 years typically from the time you start paying not including forbearance or deferment), but you also risk paying more unnecessarily due to interest rate hikes, policy changes, your loans being sold to a crappy company etc... In other words - the faster the better. I currently pay about $300 total each month in loans, I would like to not have to do that anymore.

Advanced Payments
If you want to send in an extra amount towards your principal, DO NOT use the regular payment system they have online. You need to call your loan owner/servicer and get instructions on how to do this. If you do not call and get the specific instructions, then the payment you sent in is going to be treated as a PRE-PAYMENT which is not the same thing as paying down your loan.

The best way to look at your loans (in my opinion) is in $5,000 chunks (5K Chunks). You want to strive to pay off those chunks. Let's say you have a $30K loan, 30/5 = 6 - 5K Chunks. It doesn't change anything, but it makes the loan a little less scary because you only have to pay down six 5K loans. So if you save up some money to do this, then you will be doing double duty on your payments because between your savings and the monthly payments that you are making you will wear down those chunks to zero.

Don't go broke paying down your loans though, it isn't smart to take all of your savings and throw it at your loans, you want to have a cushion for those rainy days. It is easier to make those monthly payments, rather than pay it all off and then possibly lose your job unexpectedly with no money to fall back on.

What are Pre-Payments
Pre-payments are just like they sound, you just paid in advance so you don't have to pay later. Basically there is a credit on the books, so your following monthly balance will be paid off and you will most likely receive a bill of zero dollars for that month. This can be confusing for a lot of people, it was confusing to me because I made this mistake. It isn't very intuitive, just like companies not consolidating Sub and Unsub loans after entering the payment term...

Conclusion
Loans, much like credit cards, are not that scary if you understand them. Remember you got this loan for a reason, so now you have to pay it back that was the agreement. The faster you pay it down the better because you will pay less in interest and you can get your disposable income back into your pocket.