GETTING PERSONAL: How To Pick A Student Loan Consolidator
1 June 2004
Dow Jones News Service
© 2004 Dow Jones & Company, Inc.
By Kaja Whitehouse
A Dow Jones Newswires Column

NEW YORK (Dow Jones)--Here's another way you might save money on your student loans: Pick the right company to consolidate them.

Starting in July, demand for consolidation services is expected to tick higher as interest rates on certain federal loans, like the popular Stafford loans, drop to historical lows. People who consolidate their federal student loans between July 1, 2004, and June 30, 2005, will be able to lock in these low rates for the life of their loans.

In addition to researching whether and when to consolidate, it's also vital to choose the right consolidator. Once you roll your loans into one loan, you can't turn back, and so it's important to do it right the first time. That means looking for a lender with good discounts, which can lower your interest rates over time. It's also important to seek out a reliable and steady lender that's more likely to hold onto your loan, therefore ensuring you benefit from those discounts.

Choosing the right consolidator is hard, because so many new companies have cropped up since strict rules governing consolidation were loosened in 1998. Before then, graduates were required by law to consolidate with an existing lender. Now, anyone with more than one lender is free to give his consolidation business to any company willing to take it.

The only student-loan borrowers still not granted the freedom to choose any company to consolidate their school loans are those with just one lender holding their existing loans. These people still have to turn to their existing lender to consolidate.

Forget About Rates And Fees

When looking for a lender to consolidate your loans, you want to first eliminate rates and fees as factors in your search. No matter where you go, you will always be quoted the same interest rate and zero fees when consolidating under the Federal Consolidation Loan Program.

"Lenders will often do their marketing so it clouds the issues," said Meredith Robinson, of the Kentucky Higher Education Student Loan Corp., a state lender in Louisville.

"We cannot manipulate interest rates and we cannot charge fees," she said.

Instead, you want to look for so-called discounts that can drop your interest rate or payments over time. While consolidation loan rates are predetermined by a calculation set by the federal government, discounts are offered by the lenders themselves, and so it's important to shop around.

There are two common discounts. One is offered when you enroll in the lender's automatic bill payment program. The other is given as a reward for making a series of on-time payments, usually after a few years.

Sallie Mae, a major provider of education funding in Reston, Va., offers a 0.25% immediate interest rate reduction to people who enroll in the company's automatic bill payment program. It gives another 1% reduction to people who make regular, on-time payments for three years on loan balances of more than $10,000.

Some lenders will provide a cash rebate to borrowers who make regular, on-time payments rather than lowering interest rates. Under this scenario, a borrower with $30,000 in loans could get a check for $300 or so after just six months of on-time payments. This sort of discount may save you less over time, but it could work out better for people who are unsure of their ability to pay their future bills, or for those who need cash.

One of the best discount programs comes from the Utah Higher Education Assistance Authority, a state lender in Salt Lake City. With this lender, you get a 1.25% discount simply for enrolling in the automatic payment program. On top of that, it promises a 1% additional discount to people who make four years of on-time payments.

Better-Than-Average Discounts

In fact, several of the state guaranty agencies, like the Utah Higher Education Assistance Authority, provide better-than-average discounts, said Mark Oleson, the director of financial counseling at Iowa State University in Ames. These nonprofit state agencies sprung up in the 1970s to meet demand for loan purchases in the secondary market. Not every state has one, and not every one has a good discount program. But since they're nonprofits with special tax incentives, they're worth a look.

For a list of state guaranty agencies, go to the U.S. Department of Education's Web site.

Before you decide on a discount program, make sure you read the fine print, said Dan Thibeault, president of Graduate Leverage, a student loan counseling service in Cambridge, Mass., founded by a group of Harvard Business School students in 2003. Some consolidators will require that you have a certain loan amount in consolidation to benefit. Others will not give you the discounts if you consolidate during your grace period, which is often the best time to do it, said Thibeault. Plus, these discounts can change at any time, and so you want to look for a lender with a solid history of stable or improving discounts, he added.

One thing to be aware of when searching for a consolidator is the likelihood that your lender will want to sell your loan, which could result in loss or diminishment of the discounts you were counting on to lower your interest rate.

A lot of companies have cropped up in recent years to serve the burgeoning consolidation market, and they don't always have the financial ability to hold onto the loans they purchase. In some cases, selling the loans they consolidate is part of their business model.

"They are more often than not just marketing you to consolidate with them, and then they immediately turn around and sell it (the loan)," said Mark Kantrowitz, publisher of Finaid.com, a resource of financial aid information in Pittsburgh. This can result in you losing your discounts, or working with a lender with less beneficial discounts, said Kantrowitz.

Few lenders hold onto 100% of their loans 100% of the time. In fact, one reason a lot of consolidators have the exact same discounts as Sallie Mae is because they plan to sell their consolidated loans to that company, said Kantrowitz. What you want to avoid is a consolidator that has a history of selling its loans to lenders with less beneficial discounts, he said.

The best way to know if your lender might sell your loans is to ask. Another option is to take a look at the top 50 buyers and holders of federal student loans, a list available on FinAid.com. If a lender seems to buy more than it holds, you might want to reconsider.

(Kaja Whitehouse is one of four Getting Personal columnists who write about personal-finance issues ranging from new tax proposals to education funding strategies to estate planning.)

-By Kaja Whitehouse, Dow Jones Newswire; 201-938-2243; kaja.whitehouse@dowjones.com