Student Loan 101: When Looking To Consolidate, Discounts Are Key
By Kaja Whitehouse
2 June 2004
Dow Jones Newswires

NEW YORK -- You might save money on your student loans by picking the right company to consolidate them.

Starting in July, demand for consolidation services is expected to increase as interest rates on certain federal loans, such as 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 is also vital to choose the right consolidator. Once you roll your loans into one loan, you can't turn back. That means looking for a lender with good discounts, which can lower your interest rates over time. It is also important to seek out a reliable and steady lender that is 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 or her consolidation business to any company willing to take it. If your student loans are with just one lender, you can only use the existing lender to consolidate.

No matter where you go to consolidate, you will always be quoted the same interest rate and zero fees when consolidating under the Federal Consolidation Loan Program. The competition is in the discounts the lenders can offer.

"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 added.

Instead, you want to look for 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.

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 its automatic-payment program. It gives an additional 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 cash rebates 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. It offers a 1.25% discount simply for enrolling in the automatic-payment program. It promises a 1% additional discount to people who make four years of on-time payments.

Several of the state guaranty agencies 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. 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. Some consolidators will require a certain loan amount in consolidation for you to benefit. Others won't give you the discounts if you consolidate during your grace period, which is often the best time to do it, said Mr. Thibeault. Plus, these discounts can change at any time, 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 lost or diminished discounts.