Student Loan Debt Got You Down? - Loan consolidation can help.

By Bruce Record

Lately, whenever we read the newspaper or watch television, the economic news always seems to be bad. The stock market is down, jobless rates are up, and financial opportunities are disappearing.

The economic news for college students attempting to pay for their college education has been especially bleak. The Los Angeles Times recently reported that, "The nation's four-year public colleges increased tuition and fees by nearly 10 percent this year, the steepest rise in more than a decade." These conditions, coupled with shrinking endowments and less money available as gifts from the private sector, have created an increased reliance on federally guaranteed student loans.

Student Loan Assistance Still Good Investment...

Even with all the apparent bad news, the investment seems worth it. The College Board estimates that college students will earn $1 million more than high school graduates over the course of their careers. The figures are even more impressive for those who continue on to graduate school.

...But Managing Student Loan Debt Has Its Challenges

The question remains, how does one repay these ever-increasing loans and how does one manage such sizable debt? Federally guaranteed student loans are traditionally issued as variable rate loans with a repayment term of 10 years. This arrangement sometimes contributes to the problem. In many instances, former students have not even secured employment when their loan payments are scheduled to commence. Also, many times professionals are faced with substantial start-up expenses.

In 1965, the federal government passed what has become known as the Student Assistance Act . This legislation made it possible for those with large loans to extend the term of the loan for a longer period of time, based on the balance. Some loans could be extended for as long as 30 years. This solution lowers the borrower's monthly payments, but the interest charges accumulate for a longer period thereby increasing the total amount due. It also enabled borrowers to combine many loans or several disbursements into one loan, thus the term, "consolidation."

People who take advantage of this ability to lower payments are only allowed to do so once, unless they omitted a loan from this process or they acquire additional loans after their original consolidation. When people "consolidate" their loans they enjoy the convenience of making a single payment, as opposed to several payments over the course of a month.

Fixed Student Loan Interest Rate Has Its Rewards

Borrowers may also convert the variable interest rate to a fixed rate for the life of the loan. Their interest rate is determined by a formula provided by the federal government. This new interest rate is a weighted average of all the loans combined.

The ability to "fix" the interest rate is of particular importance in the present economic climate. Interest rates for student loans are now at a 38-year low, so students and graduates should "lock-in" these historically low rates, which can never go back to the cap of 8.25 percent, where they were in June of 2000. The rates can only go down. Sandra Block, a columnist for USA TODAY, advises her readers to "Consolidate now, save a bundle later."

Some Lenders Offer Incentives for Paying On Time

While the initial rates are established by a federal formula, many lenders offer special incentives to good customers. Some offer discounts if you allow the lender to automatically withdraw the payments from your bank account. Others offer additional incentives as a reward for on-time payments.

Alternatives to Student Loan Consolidation

While all consolidation lenders must operate under federal guidelines, not all student consolidation loan programs are necessarily equal. It pays to shop around. Not everyone should consolidate his or her loans. For example, people holding Perkins loans should investigate the possibility of having their loans forgiven. Government programs exist that allow borrowers to pay back their student loans by performing community service. Teachers working in teacher shortage areas should also look into those types of programs.

As with most subjects it is wise to obtain as much information as possible, prior to going forward. Here are three good sources of information regarding the student loan consolidation process:

American Collegiate Financial Services
(866) 291-0852

Sallie Mae
(888) 272-5543

U.S. Department of Education
(800) 433-3243