Time to consolidate student loans
Graduates may be inundated with offers. Here's some advice from the experts.
from the May 14, 2007 edition
Page 3 of 3
"If your entry-level salary feels a little tight, having lower monthly bills can really help," says Janet Bodnar, a columnist for Kiplinger's personal finance magazine. "You can always pay down the loan faster than necessary later on, once you've finally gotten that dream job."
Another perk, she says, is dealing with fewer bills. If a student takes out a mixture of Stafford, Perkins, and other loans, consolidating can lump everything into one tidy bill.
In the end, very few loans are repaid on time
But the biggest bonus is borrower benefits, says Walker. Since rates for consolidation are capped by the government, many lenders try to entice borrowers by offering rewards to diligent bill payers. Deals can include lowering interest rates by half a percentage point if the company can take payments automatically out of the borrower's bank account or providing cash-back deals to borrowers if the graduate makes 36 on-time payments.
Don't write off these offers as scams, says Walker. They can offer great incentives for starting out on the right track.
"But read the fine print," he warns. "Find out exactly what it means to make an on-time payment. Is one day late too late or is 15 days late too late?"
Walker adds that since these loans are paid back over such a long period of time, it's usually better to opt for a lower interest rate than a drop in the amount the borrower owes.
Kantrowitz agrees that borrower benefits can seem like a great way to save money, but he cautions that few graduates will ever see the return. Using statistics from Sallie Mae, he calculates that less than one-quarter of borrowers make their first 36 payments on time, and less than 6 percent will pay back everything on time.
"Don't assume that money is as good as yours," Kantrowitz says. "Sure, you can save hundreds, or thousands – if everything works out. But that rarely happens."
Burdened by school debt? Others will pay it for you.
If you've weighed all the options and decided that consolidating a student loan is not for you, financial columnist Janet Bodnar offers another idea: "Just get someone else to pay for it," she says. "There are many ways to have your debt wiped clean."
Agreeing to volunteer for AmeriCorps or Teach for America, she says, can reduce or eliminate student loans. Both programs ask young graduates to work for a year or two in low-income areas.
The Peace Corps allows volunteers to defer payments on certain federal loans until they return, and the program will gradually cut Perkins loan debt for each year borrowers serve.
The Army National Guard offers up to $10,000 for repaying student loans. Recruits will also find that many veterans' associations offer scholarship and tuition assistance for soldiers, according to the website, FinAid.org.
For law school grads, Equal Justice Works in Washington runs a clearinghouse for information on how to have debt forgiven in exchange for pro bono work, especially in the areas devastated by hurricane Katrina.
The American Federation of Teachers keeps a database of loan-forgiveness programs for full-time teachers. The group's website (www.aft.org) lists programs in 42 states and information on projects run by the federal government.
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