Q&A: What questions do I need to ask to get the best rates and terms on a Federal Student Loan consolidation?

Question by SummerBreeze: What questions do I need to ask to get the best rates and terms on a Federal Student Loan consolidation?
Interest rates (Sallie Mae) will most likely be going up on July 1. I have received many, many offers in the mail to consolidate my school loans (these are similar to credit card offers). I do want to lock in at a fixed lower rate before rates increase. Currently, rates vary from 2.75% to 4.75%. What do I need to know to not get screwed? Are some companies more reputable than others? How would I find out? Are there hidden fees to be worried about? I graduate this June.

Best answer:

Answer by FinAidGrrl
First, I need to clarify a few misconceptions in your question:

1) Interest rates on Federal Stafford Loans change EVERY July. They are set by the Federal government based on the 91-Day Treasury Bill. This July, they *will* be going up — but his is true for all lenders, not just Sallie Mae.

2) Rates don’t “vary from 2.75% to 4.75%.” The current rate on all Stafford Loans for all students currently in school (or for students in their grace or deferment periods) is 4.7%. In other words, the Stafford Loan that you got as a Freshman is at 4.7%, the loan you got this year is at 4.7%… and that kid sitting next to you in Bio? His Stafford Loan is at 4.7% too (even if he borrowed with Citibank).

NOTE: the student who graduated last year and consolidated last June probably has a different rate than you. This is because he consolidated before the 4.7% took effect on July 1, 2005. It’s too late to get the rate he got, so take any advice he gives with a grain of salt.

OK, so, the reason that you are hearing about those OTHER rates (as low as 2.7%) is because there are *tons* of companies competing for your business, so they are all are offering additional benefits (rate reductions, principal balance reductions, etc.) to students who consolidate with them. For your own sake, be cautious. There are a lot of disreputable lenders out there. In fact, the lender that offered you that rock-bottom interest rate is probably the least reputable of all. The really great, reliable lenders don’t have to sell their souls to get your business. The best way to find out if a lender is reputable is to ask your Financial Aid Office — they know which companies are good and which aren’t (and they often have solid working relationships with the lenders’ representatives).

For your reference, Sallie Mae is the #1 Consolidation lender (i.e they do the most business). Citibank is a distant #2. These companies are on top because they rarely (if ever) sell your loans, they offer good customer service, they are technologically advanced, and they’ve been in “the business” for ages. For a list of other consolidation leaders, try this link: http://www.finaid.org/loans/biglenders.phtml (“consolidation” is kind of toward the bottom of the page). Most of these are reputable. Any of the top 6 would be good.

There are a few other things you might want to consider:

First, you need to make absolutely sure that you’re getting a “Federal Consolidation Loan.” Some companies have their own, sketchy version of consolidation that has nothing to do with the federal gov’t. Basically, they take your nice, safe Stafford Loans and turn them into private loans with questionable terms. If you don’t get a Federal Consolidation Loan, then you won’t be entitled to any of the protection or benefits of the Federal Student Loan program. To protect yourself, make sure the application you complete says “Federal Consolidation Loan” at the top like this one: http://www.salliemae.com/apply/borrowing/pdf/SMARTLOAN_consol_app.pdf

Second, I know that “borrower benefits” are attractive — and I fully support getting the best ones for my students. But make sure that you’re weighing the monetary benefits with the qualitative benefits. When you consolidate, you’re committing to a very long relationship with a single company. That company that offered you 2.7%… Ask yourself: have you ever heard of them? Do you know anyone who has used them successfully? Are you sure that you want the 3% rate loan with the no-name company? Or would you rather have the 3.5% rate loan with a lender you know and trust. It’s up to you to decide, but before you do, make sure you know how much your overall payments would really change with that half-percent reduction. Try a “loan repayment calculator” like this one: http://www.finaid.org/calculators/loanpayments.phtml

Third, by all means, look into the companies with the really great-sounding benefits. Make sure you’ve read the “fine print”: ask them how you earn the benefit, when it takes effect, and how you can potentially lose it. A lot of [good] lenders offer “principal reductions,” but it’s important to note that these reductions often don’t take place right away and if you don’t make ALL your payments on time, you may become ineligible. NOTE: this is a very good reason to set up auto-debit (so you never miss a payment).

Fourth, there are NEVER any fees to consolidate. If you’re working with a company that has fees, RUN — it’s a telltale sign that they are one of the “bad” companies.

Finally, yes, these consolidation offers are very similar to credit card offers… except this is a much bigger decision. Unlike with credit cards, you can’t just “drop” your consolidation lender. It’s becoming near-impossible to reconsolidate, so make sure that you pick someone you trust. (Consider going with the lender you have now, since your school probably helped you pick them, right?)

EDIT: sunshine_today is sort of correct in telling you to be wary of most of the offers that you receive in the mail. However, you will also receive legitimate mail from your lender that you should not ignore. With a *true* Federal Consolidation Loan, there are no “teaser rates” — there are benefits that you either do or do not qualify for. Nor are there any variable rate Federal Consolidation Loans — Federal Consolidation Loans are FIXED RATE loans. Period. (That’s the whole point of consolidating!)

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One Response to “Q&A: What questions do I need to ask to get the best rates and terms on a Federal Student Loan consolidation?”

  1. sunshine_today says:

    FinAidGrrl has a lot of good advice.

    Please don’t get taken with those offers in the mail. Those offers are a lot like the refinance offers I used to get in the mail (until I signed up with the Direct Marketing office to get off of junk mailing lists!).

    They offer you a low rate as an introduction rate, but 2.75% is under market rate so you know that isn’t a permanent rate. Consolidation companies make their money off you by taking your loans and paying them off at face value right at the beginning of the loan. Then they sit back and collect those years of interest and payments on the loan. They will only offer you a teaser rate to get you to sign up, but once you are in, you are on the hook with them as your consolidator for a long, long time and you do not want a variable rate of interest!

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