Student Borrowers Responsibilities
When you take out a student loan, you have certain responsibilities. As stated by the U.S. Department of Education in the Student Guide – 1996-97:
- When you sign a "promissory" note, you are agreeing to repay the loan according to the terms of the note. The note is a binding legal document and states that, except in cases of discharge, you must repay the loan – even if you do not complete your education. You must also repay the loan even if you are not able to get a job after you complete the program, are dissatisfied with, or do not receive the education you paid for. Think about what this obligation means before you take out a loan. If you do not repay your loan on time or according to the terms in your promissory note, you may go into default, which has very serious consequences.
- You must make payments on your loan even if you do not receive a bill or repayment notice. Billing statements (or coupon books) are sent to you as a convenience, but you are obligated to make payments even if you do not receive any notice.
- If you apply for a deferment or forbearance, you must continue to make payments until you are notified that the request has been granted. If you don't, you may end up in default. You should keep a copy of any request form you submit, and you should document all contacts with the organization that holds your loan.
- You must notify the appropriate representative (school, agency, lender, or the Direct Loan Servicing Center) that manages your loan when you graduate, withdraw from school, or drop below half time status, change your name, address, Social Security Number, or transfer to another school. If you borrow a Perkins loan, your loan will be managed by the school that lent you the money or by an agency that the school assigns to service the loan. If you borrow a Direct Loan, it will be managed by the Direct Loan Servicing Center. If you borrow a FFEL Program Loan, it will be managed by your lender or its servicing agent. During your loan counseling session, you will be given the name of the representative that manages your loan.
- Regardless of the type of loan you borrow, you must receive entrance counseling before you are given your first loan disbursement, and you must receive exit counseling before you leave school. These counseling sessions will be administered by your school and will provide you with important information about your loan. Your lender or the Direct Loan Servicing Center will provide you with additional information about your loan.
A Borrower's Rights
A student has certain rights as a borrower. Below is a list of some of the borrower's rights:
Before your school makes your first disbursement, you will receive the following information about your loan from your school, lender, and/or the Direct Loan Servicing Center:
- The full amount of the loan
- The interest rate
- When you must start repaying the loan
- The effect borrowing will have on your other eligibility for other types of financial aid
- A complete list of any charges you must repay (loan fees) and information on how those charges are collected
- The yearly and total amounts you can borrow
- The maximum repayment periods and the minimum repayment amount
- An explanation of default and its consequences
- An explanation of available options for consolidating or refinancing your loan
- A statement that you can repay your loan at any time without penalty
Before you leave school, you will receive the following information about your loan from your school, lender and/or the Direct Loan Servicing Center:
- The amount of your total debt (principal and estimated interest), what your interest rate is, and the total interest charges on your loan
- If you have FFEL Program Loans, the name of the lender or agency that holds your loan, where to send your payments, and where to write or call if you have questions
- If you have Direct Loans, the address and telephone number of your Direct Loan Servicing Center
- The fees you should expect during repayment period, such as late charges and collection or litigation costs if you are delinquent or in default
- An explanation of available options for consolidating or refinancing your loan
- A statement that you can repay your loan without penalty at any time
If you borrow a Federal Perkins Loan, the previous information will be provided to you by your school. If you borrow a Direct Loan or an FFEL Program Loan, this information will be provided to you by the Direct Loan Servicing Center or your lender, as appropriate.
If you have direct or FFEL Stafford Loans, your school will also provide you with the following information during your exit counseling session:
- A current description of your loans, including the average monthly anticipated payments of students from your school
- A description of applicable deferment, forbearance, and discharge provisions
- Repayment options
- Advice about debt management that will help you in making your payments
- Notification that you must provide your expected permanent address, the name and address of your expected employer; the address of your next of kin, and any corrections to your school's records concerning your name, Social Security Number, references and driver's license number (if you have one)
You have the right to a grace period before your repayment begins. (Your parents do not receive a grace period for the PLUS loan). Your grace period begins when you leave school or drop below half-time status. The exact length of your grace period is shown on your promissory note.
During exit counseling, your school, lender, and/or the Direct Loan Servicing Center as appropriate must give you a loan repayment schedule that states when your first payment is due, the number and frequency of payments, and the amount of each payment.
You must be given a summary of deferment and discharge (cancellation) provisions, including the condition under which the U.S. Department of Defense may repay your loan.
If you or your parents borrow a FFEL Program Loan, you must be notified when:
- Your loan is sold, if the sale results in your making payments to a new lender or agency
- Both the old and the new lender or agency must notify you of the sale
- The identity of the new lender or agency holding your loan
- The address to which you make payments
- The telephone numbers of both the old and new lender or agency
- This does not apply to Perkins or Direct Loan borrowers
Consolidating Student Loans Can Improve Your FICO Score
Most people are aware that consolidating student loans can greatly lower their monthly payments. However, many borrowers don’t realize how great of an impact consolidating student loans can have on their FICO score. Consolidating student loans is perhaps one of the most effective ways to quickly improve your FICO score, in turn saving a great deal of money on future big ticket credit purchases like cars and homes.
The anatomy of a FICO score
A FICO score is derived from giving a numerical value to different elements of creditworthiness and running those numbers through a complex algorithm. The score considers your current and past financial situation in order to make a prediction about how likely you are to pay your bills on time in the future. Each credit-worthiness factor is weighted according to its importance:
35% - Payment history
30% - Amount of debt owed
10% - Length of credit history
10% - Types of current credit
15% - Miscellaneous
The direct impact of consolidating student loans on your credit
The first way that consolidating student loans positively impacts your FICO score is by closing all of the open student loans and replacing them with one, predictable, fixed interest loan. Because the amount of debt owed is such a highly ranked factor, reducing the amount owed can make a big impact on your overall score. Lenders most certainly consider debt to income ratio when deciding if you can comfortably take on a new payment. Because consolidating student loans can reduce your monthly student payment by up to 60%, your debt to income ratio can be significantly lowered.
If a graduate with a $30,000 debt pays around $313 per month before refinancing. After consolidating student loans, the new loan payment is around $106, freeing up an additional $207 per month. When considering the purchase of a new vehicle with a $300 monthly payment, having an extra $200 a month in disposable income can be a deciding factor on whether or not you can secure the auto loan at a favorable interest rate.
The indirect impact of consolidating student loans on FICO score
The reason most young adults find themselves in credit trouble is because they often need to rely on high interest credit cards to get through school and the years following graduation. People just out of college already have the chips stacked against them with a long future of student loan bills and plenty of things to purchase. Additionally recent graduates are usually just starting their careers and earning only a fraction of their likely future salary which makes it more difficult to pay off old credit card debt and easy to take advantage of new offers.
Saving several hundred dollars a month by consolidating student loans can give graduates the additional income needed to pay down harmful high interest credit card debts. If the student in the above example were to use the savings from consolidating student loans to pay down credit cards, this would add up to $2,400 per year and $12,000 over a span of 5 years.Being financially savvy is the art and practice of leveraging good debt to eliminate dangerous high interest debt.
Student loan consolidation: how it works to lower your monthly payments
When consolidating student loans, your lender pays off all of your existing variable interest rate loans then writes a new, fixed interest rate loan which you are then responsible for. The borrower still retains all of the benefits enjoyed before consolidating student loans such as the ability to defer payments or apply for forbearance.
The main reason why payments can be so much lower after consolidating student loans is that the loan can be spaced out over a longer period of time, thus reducing the amount due monthly. Borrowers can pay off the loan early at any time without penalty should they choose. By consolidating student loans, graduates can leverage what they have a lot of – time, against something that is generally less readily available – money.
Building a strong financial base and maintaining a healthy FICO score is a critical factor in the type of home you can own, the type of car you can buy, and the quality of life you can enjoy. Consolidating student loans today means taking the first step in building a strong financial future.
5 Incentives to Consolidate Student Loans
Each year on July 1st, student loan rates change based on the government’s established rate calculation. For years this date has come and gone without alarm, but 2006 marks one of the largest increases in history. Not only will interest rates rise sharply, but many benefits that borrowers have grown to count on will also now be eliminated.
Here we detail 5 money-saving reasons to consolidate student loans by the 1st of July:
Reason #1: Interest rate hikes on student loans
On July 1st, 2006, the current variable rate for existing Stafford Loans will increase from 4.7% to 6.54% during deferment and grace periods, and increase from 5.3% to 7.14% in repayment. PLUS loans will shoot skyward from 6.1% to 7.94%. By consolidating student loans before July 1st, borrowers have the opportunity to lock into today’s current rate before the hike. All it takes is for you to apply online by June 30th. If you miss the July deadline, the cost could be substantial. You could end up with a rate that is 4% higher than what you could consolidate at today, and pay $15,000 or more in extra interest costs.
Reason #2: Lower monthly payments
Applying for a federal consolidation loan with ScholarPoint can lower your monthly payment by up to 63%. For example, a borrower with $50,000 in student loan debt can consolidate and reduce the monthly loan payment from $537 to $198. This leaves more money in your pocket and eases the financial impact of student loans. Consolidation gives students and parents much needed freedom and flexibility when making financial decisions.
Reason #3: The end of student loan consolidation while still in school
Previously, students could consolidate student loans while still in school. As part of the new legislation going into effect on July 1st, students will no longer have this option. This means that students will either have to consolidate student loans at whatever the rates are when they graduate, or continue to pay the government’s fluctuating variable interest rates until they feel the rate is right to lock in. 2006 graduates who are currently in their post graduation grace period should move quickly to consolidate student loans before July to lock in the lower 2005-2006 interest rates.
Reason #4: No more spousal student loan consolidation
Many married couples have enjoyed the opportunity to consolidate student loans together into one low monthly payment. Another of the July 1st changes will be to cut this option from the list of student loan benefits. Couples who miss the July 1st deadline will still be able to consolidate student loans individually and save up to 60% on their current monthly payments. But, they would be consolidating at a much higher rate.
Reason #5: Shopping for a more favorable student loan consolidation lender will be more difficult
Up until now, borrowers have had the option to shop around for a lender with which to consolidate student loans, even if they had previously consolidated. With the new legislative changes, borrowers won’t be able to switch lenders once they’ve already consolidated except in specific circumstances. Unless one or more of your student loans were left out of your original consolidation or if your lender doesn’t offer an income sensitive repayment plan, you must remain with your current lender under the new laws.
How to Choose a Student Loan
By Kara Alaimo
Looking for savvy ways to finance your education? Then it’s time to go shopping – to look at a range of loan options, that is. As interest rates on federal college loans rise and shift to fixed rates, experts say it’s more important than ever to accurately calculate the cost of your education, consider all of your financing options and knowledgably select the ones that will be cheapest over time. Here’s how to do it:
INVESTIGATING OPTIONS
“A popular mistake students make [when it comes to college loans] is not knowing all their options,” says Raza Khan, president and co-founder of MyRichUncle, which offers private student loans. “The challenge seems so daunting, that most students take the first loan option they’re offered.”
But as of July 1, 2006 federal college loans, which were previously based on market rates, have moved to fixed interest rates. For the PLUS loan, that means an interest rate of 8.5 percent, and for Stafford loans, 6.8 percent. Khan says, if market interest rates go down, private loans may become a better option.
Even if federal loans remain the best deal, Khan says, the cost of education is so expensive that most students need to supplement the federal loans they’re offered with private ones. In this case, he warns, “the loans which a university recommends may not be the cheapest financing option available.”
A recent “60 Minutes” investigation revealed that some universities offering students particular financing options were receiving kickbacks from the organizations financing the loans. To make sure you’re getting the cheapest interest rate, investigate all of your options, including loans recommended by your school and those available from other sources.
MyRichUncle, for example, offers a variety of loans tailored for particular needs, such as those customized for students who need cash to live on when they complete unpaid internships or are studying abroad at international institutions. Recently, the company began offering pre-prime products, which lend to students who lack credit -- and as a result would typically have a hard time securing loans – based upon unconventional factors such as academic performance.
CHOOSING THE CHEAPEST RATE
It may sound obvious to recommend choosing the cheapest financing option available, but Mark Kantrowitz, publisher of finaid.org, says often students do not.
“A lot of students will select private loans because the student has the obligation for repayment, even though prior to the change in rates PLUS loans were cheaper,” he says.
But, even if the loan is technically in your name, most loans require a parent co-signer. Either way, parents are on the hook – so better to go with the cheapest deal. Kantrowitz also emphasizes the importance of accurately calculating the cost of education. Remember that tuition costs are likely to rise each year, so multiplying the cost of tuition for your freshman year by four won’t work.
When looking at private loans, take into account all of the costs associated with them – such as origination fees and the ways in which interest will compound over time (Finaid.org has calculators to help you figure this out). And be sure that you’re comparing the lowest rate that you will qualify for with each organization, which may differ from the lowest rate on offer based on factors such as your credit.
LUCRATIVE LOOPHOLES
If federal rates remain the cheapest option, being savvy can help you save.
“Once you have been in school for two years, consolidate your PLUS loan every year,” Kantrowitz says.
Although the PLUS loan is now fixed at 8.5 percent, the maximum interest rate for consolidated loans is capped at 8.25 percent. By consolidating, you’ll save a quarter percent.
Kantrowitz also says you’ll lessen the amount of dough that the government believes you can afford to spend on college – known as your Expected Family Contribution, or EFC, on the Free Application for Federal Student Aid (FAFSA) – by limiting the amount of money in your name on bank and other accounts.
While the government looks at 35 percent of your own assets in considering your ability to pay for college -- a number that will change to 20 percent on July 1, 2007 -- the maximum they will consider is 6.4 percent of your parents’ assets. So spend your own money first.
EVERY BIT COUNTS
John Hadeed, a senior studying business management at Fordham University in New York, is keeping his loans in check while he’s in school by paying just the interest each month.
“If I waited until I was out of school to start paying, my loans would have gone up by several thousand dollars simply in interest,” he says.
You may not be able to pay much while in school – that’s the reason for the loan – but small efforts like this can amount to a big difference over time.
Need more information? Finaid.org offers a variety of tools to help, including information on loans and savings, and calculators to estimate the cost of college, your EFC and loan payments. With a bit of work, locking in a better deal could save thousands of dollars over the life of your loan.
What are Alternative Loans?
Private or Alternative loans can be used to make up the difference between what your school offers you and what you have to pay. More than 40 companies offer more than 100 alternative student loan options, so you are very likely to find something that fits your needs, and there are NO GOVERNMENT FORMS to complete. You can use the eStudentLoan LoanFinder to compare these loans and find the best fit for you.
All of these loan programs will do a credit check and/or an income-to-debt ratio check on either the borrower, co-signer or both. Alternative loans are not federally guaranteed and can take several weeks to process. Typically, the lower the cost of the loan, the more restrictive it is.
Also, your eligibility for alternative loans may be affected by your government loans, whether your school participates in the FFELP or the FDLP programs, and other factors.
More about Alternative Loans
The purpose of alternative loans (also called private loans) is to supplement the student and parent education loan programs available from federal and state governments. These programs are established by private lenders, and some offer terms that are highly competitive with those of the PLUS and unsubsidized Stafford loans. Some can be more expensive.
Before obtaining an alternative loan, be sure to compare the terms with those of other loans, including federal and state education loans, home equity loans and lines of credit, personal lines of credit, credit cards, loans from retirement funds and insurance plans, and personal loans from relatives, friends, and neighbors. Calculate the total cost of an alternative loan before signing up for a loan that offers a lower introductory rate or a tiered origination fee (charged when the loan is taken out and then again when repayment begins). These can seem like better deals, but may have hidden charges and fees.
Keep in mind that the Federal Consolidation Loan program consolidates only federal loans and will not apply to loans received privately. Some alternative lenders may offer loan consolidation programs that consolidate federal and alternative loans, though they may be at higher interest rates. If this is a consideration for you, ask the lender about consolidation options and their costs before getting an alternative loan.
Before choosing an alternative loan, ask yourself these questions:
- How long has the organization been involved in providing student loans?
- Would my school's financial aid office recommend this lender?
- Does the organization sell its loans and if so, how often, to whom, and with what consequences?
- What special services does the organization offer to borrowers, including cooperation with the school, toll-free help lines, and campus representatives?
