What to Know About Federal Student Loans

Ah, student loans. For many of us, they are the first (and sometimes largest) debt we will encounter in our lives. The fact is, in the last decade, the total amount of federal loans students have received has more than doubled. The scary thing, the education these students receive on what to do with these loans after college has decreased. We have come to an age where convenience is key. Instead of financial aid advisers sitting down with students and explaining the student loan process, they herd 1500 freshman into an auditorium and throw a volunteer in the middle with a microphone. Can you imagine, 4 days before classes start and you want me to listen to some underclassman blab about student loans?? Especially when my parents take care of everything (my favorite!!!). No way, they’re thinking about where the first party of the semester is being held and who’s supplying the booze and other paraphernalia.

That’s where I come in. After students have been misinformed and confused to all get-out, I tell them what they need to hear (though not always what they want to hear). I deal primarily in Federal loans, so everything I say here will most likely relate to them. And to think I’d do this after an 8 hour day at work!!! The fact is, I LOVE my job. I love talking to people and hearing the relief in their voice after they come to understand the basics (and sometimes advanced topics) of federal student loans. If you need answers to specific questions, I would suggest having your loan information handy during this blog. If you do not have up to date information, you can visit the handy dandy NSLDS website (Nation Student Loan Data System). You will need you social security number and 4-digit federal aid PIN to view your information. Go to www.nslds.ed.gov.

The Higher Education Act of 1965

Perhaps you have heard of this legislation, maybe in the legal jargon on your student loan information. You may have heard a federal aid adviser mention it at some point. The HEA provides funding for most student aid programs. Every 5 years, congress reviews the HEA and makes necessary changes that last for the next 5 years. For instance, on July 1st, 2006 a new rate was put into effect for all loans taken out between July 1st, 2006 and July 1st, 2011. The rate is fixed at 6.8%. This is called reauthorization.

One of the most important parts of the HEA is the list of rights you have as a borrower.

Consolidation

OK, so I’m sure you have all gotten NUMEROUS calls from Al at so and so financial asking if you’ve consolidated. He’s got an offer you can’t refuse…literally. As much as you want to blow him off (if you don’t now, you will by the end of June), take a moment to hear what he has to say. The fact is there are hundreds of companies out there who want your loans. Your job is to find the company that gives you the best benefit (and hopefully the best customer service). Congress established the Federal Consolidation Loan program for a reason, to make paying off your loans easier. So it’s definitely in your best interest to find out which companies offer you the best product.

The problem is, there are so many companies with so many different offers and stories and blah blah blah…So lets clear the air. The first thing to remember is Federal Consolidation is not a rate game. You cannot get a “better” rate than you already have. Whatever your rate is at is what it will be after you consolidate (rounded to the nearest .08%. This is also across the board). If you have multiple loans with different rates, your rate will be determined by a weighted average. The great thing is, this locks in your interest rate and saves you from rate increase hell! Over the past 3 rate changes (including the upcoming one in July) the rates have jumped almost 4%. That’s insane and very painful for the checkbook. I know, I hear mine screaming every month.

But here’s the catch…ah ha, you knew there would be one. Most companies can offer you incentives to lower your interest rate as you pay off your loans. If you have already consolidated and don’t know about this, ask your servicing company if they offer anything like this. The most common rate reductions reduce your rate by .25% for participating in an automatic debit program (they charge your bank account automatically every month) and 1% after the first 36 consecutive payments are made on time. Some companies allow you the 1% reduction after 24 consecutive on time payments. No matter WHAT the incentive, always be sure to get it in writing before you sign anything. If it sounds too good to be true, it probably is. I have had many clients who have been burned by companies who promised them one thing, and then surprised them with hidden stipulations. Be sure to get all the details.

A federal consolidation should never have a fee. This is a free federal program and anyone who tells you otherwise is lying. A federal consolidation does not require a credit check. Some companies may have this as an option to gain access to your loan information and provide you with an accurate estimate on payments and rates. However, there are many other ways to obtain this information without accessing your credit. Accessing the NSLDS website is one way you can provide a company with this information. You can also make a quick call to Federal Aid (1-800-4-FED-AID). They can provide you with limited information about your student loans. A good consolidation specialist should be able to give you an estimate with this information. A consolidation company should NEVER ask for your 4 digit federal aid PIN and you should NEVER give it out. Your PIN gives you access to all your federal aid information and should be kept under lock and key, or under the protection of your memory.

Consolidation also allows you to extend the length of your term, allowing you to make lower payments. The government gives you 10 years to pay off unconsolidated loans. Through consolidation, your term can be extended up to 30 years depending on your balance. This can reduce your payments up to 50%. The number one reason borrowers consolidate is to lower their payments. When you choose to consolidate, look for a company that does not have a pre-payment penalty. It’s great to have low payments to begin with, but not may people want to still be paying their loans when their grandchildren are born. You want the opportunity to pay the loans off quicker without penalty if you can.

Making Monthly Payments

This is pretty basic. Not many people have 20 grand at any given moment to pay off their loans…and if they did, they probably would have paid for their education out of pocket.

Deferment

Lets face it, we have all seen times where money is tight, or circumstances arise. Deferment allows you the opportunity to temporarily postpone your loan payments. Subsidized loans will not accrue interest during this time (the government takes care of that for you!). Unsubsidized loans continue to accrue interest and you have the option to make interest payments on these loans while in deferment or let it capitalize at the end of the deferment period. Most deferment periods last 6 months and require a reapplication at the end of the 6 months. The exception is a deferment for economic hardship. These last for 12 months.

This is a great Deferment Chart I found while surfing the net. It shows all the options you have for deferment. Just remember, this is your federal right. If you need it, use it.

Forbearance

Forbearance, like a deferment, can postpone your payments for a time. This is usually done in 6-month increments and reevaluated at the end of each 6-month period. You may be required to make interest payments while in forbearance. Sometimes this is better since interest will accrue on subsidized AND unsubsidized loans during forbearance. I typically advise my clients to save forbearance time for emergencies (i.e. short term leave from work, your car breaks down, a natural disaster) because they are much easier to qualify for and often need nothing more than a click of a button online. This chart also has information on the qualifications for forbearance.

Cancellation or discharge

Under certain circumstances, your loans may be canceled or discharged. Don’t go jumping up and down just yet. Here’s what has to happen to you first…

• Death (in the event of the borrower’s death, this debt does not pass on to anyone else)
• Total and Permanent Disability
• Closed school (the school has to close WHILE you are attending)
• False loan certification
• Bankruptcy (the ONLY way this flies is if you can prove to the courts that your student loan payments are the reason you are filing. Otherwise, they won’t be included in the bankruptcy)
• Rehabilitation

Put simply, it’s your “out” if you default on a federal loan. Rehabilitation gives you the opportunity to make payment arrangements with the lender (or collection agency) who holds your loan after it has been defaulted. Most lenders require 6 consecutive on time payments to “cure” your default status, although the amount of time can vary between lenders. Again, rehabilitation is your federal right. If you have defaulted on a loan, don’t put it off any longer. It’s sooooo much better to do a rehabilitation than end up having your wages garnished or your tax return swallowed.

CharliezAngel