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With college graduation season in full swing,  Money101 has been flooded with questions about repaying student loans. We talked to experts to find out the best ways to get debt free quickly.  

 

My daughter got a private student loan without really consulting me--it is a personal loan with a 10% interest rate. I hardly can sleep thinking about the economy in the toilet and her paying 10%; the interest is accruing daily. Is there a company that loans money to students at a 3% fixed rate? 

The purpose of a non-federal loan is to fill the void between private and federal loans.

“Private student loans are intended to the fill educational funding gaps after other lower-cost sources of financial aid [like] scholarships, grants, Federal Stafford loans, have been exhausted,” says Mike Weber, vice president of marketing for Credit Union Student Choice.

According to Weber, published rates show the average private student loan interest rate is around 10%. “Keep in mind that private student loans are credit based, so a student applying for a private student loan who has a co-borrower with excellent credit should be able to qualify for a lower rate.”  

But without a co-signer, lenders tend to view students as risky--pushing interest rates higher.

“The lowest rates credit unions involved with the Credit Union Student Choice program are offering is right around 5.5% to 6.0%,” says Weber. A potential upside to private loans is that the rates are not fixed and can adjust on a quarterly basis.

Reyna Gobel, author of Graduation Debt: How to Manage Student Loans and Live Your Life recommends you double check the loan contract to verify the amount and interest rate terms. “If she isn’t borrowing the maximum federal student loan amounts possible, she should borrow more next year to pay off her private loan. Then, she’ll have a fixed-rate and federal student loan repayment options. If she doesn’t need all of it, she can repay part of it now — usually without a prepayment penalty.”

My daughter will be graduating college in a few weeks--she has about $50,000 in loans. We will consolidate these loans. Would it be in her best interest to apply for the re-payment loan based on her income the new IBR plan? She of course has not found employment yet.

Recent grads like your daughter will get a small window of time--about six months--to decide how to tackle the debt, says Reyna Gobel, author of Graduation Debt: How to Manage Student Loans and Live Your Life.

“This is a great time to study a variety of plans: income-based, consolidation, and public service loan forgiveness.”

Effective July 1, 2009, the Income Based Repayment plan is a repayment planner for the major types of federal student loans. According to StudentAid.edu.gov, under IBR, the required monthly payment is capped at an amount that is intended to be affordable and based on income and family size.

To find out if you are eligible for IBR click here

Under an IBR plan, if you make payments for 25 years and meet other requirements your remaining loan balance could be cancelled. Also, if you work in public service for 10 years and have made some payments, your remaining balance could be voided.

But always do research and stay current with regulation changes. “First, the rule that caps repayment at 20 years applies only to loans issued beginning July 1, 2014,” says Gobel. “Second, a $50,000 consolidation loan has a 25-year term, which is equal to the maximum term for income-based repayment. The main benefit for income-based repayment is if the payment was reduced for the full 25 years.”

Payment amounts also fluctuate based on income levels. “At times, the resulting payment could be higher than under a consolidation loan,” explains Gobel.

Check out online calculators to get a sense of payment variability.

 

I would like some information regarding the correct way to advise my daughter who is graduating in May 2010 from Regis.  She has approximately $50,000 in student loans deferred till December 2010, with interest rates varying from 6.75% to 8.89%. Is she better off to consolidate the loans into one OR consolidate the two lower interest rates of 6% OR pay off the lower loan amount ($7500) with the higher interest rate?

The first thing the experts advised, is for your daughter to read her promissory note(s) to understand her loan type.

All loans are not created equal: You need to separate your federal loans from your non-federal loans.

 “Although they are both loans made to students, this is not an apples-to-apples comparison because one is federally regulated with federal benefits while the other carries lender-dictated terms,” says Robyn LeGrand, regional director of business development with the National Student Loan Program.   

 If you have federal loans, consolidation can be a good way to make repayment more convenient by creating a single new monthly payment. If you previously had variable interest rates on federal loans, they will be converted to a fixed rate.

According to LeGrand, students are able to leave certain federal loans out of consolidation. “This is common with Federal Perkins Loans because these loans have low interest rates with more cancellation provisions. These provisions are lost once the loan becomes part of a federal consolidation loan”

If you are still in your six-month grace period, wait until it’s almost over to consolidate. “When you consolidate, you enter repayment immediately,” says LeGrand.  “Discuss the timing with the consolidating lender to ensure you maximize your benefits.”

Keep in mind that by consolidating your federal loans, you are repaying the loan over a longer period of time—meaning you pay more interest.

In this particular case, you may have private loans which could have a fixed interest rate.

“Private loans never receive any government interest subsidy, so all interest accrued while the borrower was in school or during the grace period that has not been paid will be added to the principal balance creating a new, larger balance,” explains LeGrand.  “In addition to paying interest on the original amount borrowed, you will be paying interest-on-interest.  If possible, pay this amount off before it is added to the original amount borrowed.”

Whether or not you decide to consolidate, LeGrand suggests paying off the loan with the highest interest rate first. “Once this loan has been paid off, take the money that you were paying on that loan and start chipping away at the loan(s) with the lower rate.”

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These responses do not  include recent changes in the lending industry due to the passing of the health care bill in Congress.