Ins and Outs of Student Loan Consolidation

What is the interest rate on my loans?

The interest rate on your loans depends on what kind of loan you have, when your loan was disbursed, and whether you are in school or in repayment.

Direct Subsidized and Direct Unsubsidized Loans

Direct Subsidized and Direct Unsubsidized Loans disbursed on or after July 1, 2006 have a fixed interest rate of 6.80%, regardless of whether you are in school or in repayment.

Direct Subsidized and Direct Unsubsidized Loans disbursed before July 1, 2006 have a variable interest rate that is adjusted each year on July 1.  This variable interest rate is equal to the 91-day Treasury Bill (T-Bill) rate plus a variable number of percentage points, depending on when the loan was disbursed and whether you are in school or in repayment.  By law, the interest rate on your loans can never exceed 8.25%, except for loans disbursed before July 1, 1994, for which the interest rate is capped at 9.0%.

Interest Rates on Direct Loans

*Current rates are valid through June 30, 2007.

Your loan servicing center will notify you each year in writing about the interest rate that will go into effect on July 1. Note that the fixed amount you pay each month will be adjusted to account for any changes in the interest rate. The length of your repayment period will not be adjusted for interest rate changes unless you request it by contacting the Servicing Center.

Federal Perkins Loans

The interest rate on all Federal Perkins Loans is fixed at 5.0%.

How is the interest on my loans calculated?

The interest charged on Direct Loans and Federal Perkins Loans is calculated on a simple daily basis. This means your interest charge will be calculated each day over the course of a year. Each of your payments is applied to both the interest that was added during the previous month and your principal balance (the total amount you still owe). If you want to pay all or part of your loans early, the interest you are required to pay will be computed only to the day on which you pay back the loans in full.

• If you have Direct Subsidized Loans, no interest was charged on your loans while you were in school, and none will be charged during your grace period.  The federal government pays the interest on Direct Subsidized Loans while the borrower is in school, in deferment, or in a grace period.
  
  
• If you have Direct Unsubsidized Loans, interest was charged on your loans while you were in school -- you may or may not have been paying that interest.  You will also be responsible for the interest that accumulates during your grace period. If you have Direct Unsubsidized Loans and you do not pay the interest as it accumulates, it will be capitalized when you enter repayment.
  
  
• If you have Federal Perkins Loans, no interest was charged on your loans while you were in school, and none will be charged during your grace period.  As with Direct Subsidized Loans, the federal government pays the interest on Federal Perkins Loans while the borrower is in school, in deferment, or in a grace period.

Note: Often, when you hear people talk about loans and interest, you hear them make a statement such as, "Interest accrues at the rate of 8.25 percent." The word "accrues" simply means "accumulates." You might also hear people say, "Interest is charged at the rate of 8.25 percent." The terms accrues, accumulates, and is charged may be used interchangeably.

Repaying your loans

Step 1: Understand the Grace Period

• Your grace period begins on the date of school separation or graduation.
• The grace period is a period of six (6) months where you will not have to make any payments on your loan.
• At the end of 6 months, the grace period ends and your student loans enter repayment status — your first and consecutive monthly payments will then come due.
• For loans disbursed July 1, 1995- June 30, 2006, the interest rate will increase by 0.6% once your grace period ends.

Step 2: Lock-In Your Lower Grace Rate

• You can lock-in the lower grace rate by consolidating your student loans while they are in grace
• Note that when you consolidate, your grace benefits will end.
• The trick is to consolidate your loans just before the time your grace period ends so that you can enjoy the grace benefits and lock-in the lower rate.

Step 3: Don't Delay

• To meet the consolidation requirements, you must process and verify your application with a consolidation lender.
• The time to complete this may vary from 2 or more weeks — depending on how fast your schools and loan servicers verify the information.
• A good rule to follow is to consolidate your loans at least 30 days before your grace period ends.

Step 4: Get the Paperwork Done Early

• Your best option is to consolidate your loans as soon as your grace period begins.

All about Deferment and Forbearance

What is a Deferment?

A deferment is a period of time during which you are not required to make payments. During the period of deferment, interest continues to accrue on the loan. Deferments are not automatic; you must apply for them. You must be fewer than 180 days delinquent, make a request in writing, provide the necessary documentation, and have a loan type that is eligible for deferments (Subsidized and Unsubsidized Stafford, SLS, PLUS, or Consolidation Loan). There are numerous deferment options, depending on loan type.

If you are a Federal PLUS borrower, you may be eligible to defer principal and interest payments based on your own status (not your child's). Some of the acceptable reasons for deferment are:

• School attendance
• Unemployment
• Economic hardship

If you have a Subsidized Federal Stafford Loan, the government has been paying the interest for you; in case of deferment, the government will continue to pay it. You may qualify for a deferment if you meet any of the following conditions:

• At least half-time study
• Unemployment
• Economic hardship
• Graduate fellowship
• Rehabilitation training

Interest Accrual During Deferments

During deferments, interest accrual policies vary by loan type:

• Federal PLUS Loan
  Interest will continue to accrue during all deferment periods. (If you have an outstanding balance on a Federal PLUS Loan made prior to July 1, 1993, you may be eligible for deferment based upon the dependent student's in-school status.)
• Subsidized Federal Stafford Loan
  The U.S. Department of Education will pay the interest during the deferment period.
• Unsubsidized Federal Stafford, SLS, or Consolidation Loan
  The borrower is responsible for all interest that accrues during deferment periods and may either pay or defer your interest charges. Deferred interest accrues and is capitalized (added to principal) when repayment begins. Consolidation loans are eligible for the interest subsidy only if all of their underlying loans are Subsidized Federal Stafford Loans.
• Federal SLS Loan (if you also have a Federal Stafford Loan)
  You may defer the start of repayment of SLS loan principal until six months after you stop attending school at least half-time so that SLS repayment coincides with a Federal Stafford Loan repayment. Interest accrues during this time. You may pay interest immediately or defer it until it is capitalized. The borrower must call the lender/servicer to request this option.

What is a Forbearance?

Forbearance is a temporary end to or reduction of payments, or an extension of time for making payments. Lenders may grant forbearance if you are having difficulty repaying your loan (Stafford, SLS, PLUS, or Consolidation Loan) but aren't eligible for a deferment. The objective is to prevent you from going into default on your loan or to allow you to resume honoring your repayment obligation after you've defaulted. The lender may grant forbearance to you only if they believe that you intend to repay the loan but are unable to make payments due to poor health or other acceptable reasons.

• When you're in forbearance, interest continues to accrue on your account.
• The forbearance period is excluded from the period of repayment. Thus, if your repayment period is ten years, you won't be using up part of that ten-year period while you're in forbearance.
• Lenders may not charge you any fees to grant you a forbearance.
• Lenders also can't report negative information about your repayment status to credit bureaus simply because they have granted you a forbearance. (They could report negative information to credit bureaus if you were behind on payments and did not receive a forbearance.)

Apply for forbearance in the same way you would for a deferment--obtain a form from the school financial aid office, your lender/servicer, or the guaranty agency. Call your lender/servicer to find out if they have a special form for forbearances. As with a deferment, you must continue to make payments on your loan until you're notified that the forbearance has been granted.

Delinquency and Default

It's important that you stay on top of your student loan repayment. If you're late on a scheduled payment, you are considered to be delinquent on the loan. If you are more than 90 days late, delinquency will be reported to national credit bureaus.

If you are 270 days late on a scheduled payment, you are in violation of your loan agreement, and it will be assumed that you do not intend to repay the loan. Defaults are reported to national credit bureaus and remain on your credit report for seven years. This may affect your ability to obtain an auto loan, credit cards, or other financing. Other consequences include:

• The entire unpaid amount of the loan, including interest, may become immediately due and payable.
• The federal government may collect loan payments from federal and state income tax refunds, garnished wages, or state lottery winnings.
• You will be ineligible to receive any additional federal or state financial aid funds (Pell and Supplemental Educational Opportunity Grants, Federal Work-Study, the Perkins, Federal Subsidized and Federal Unsubsidized Stafford, and PLUS Loans) at any institution.
• Default will have an effect on the future of this loan program and could jeopardize the educational opportunities of future students.