Deferment and Forbearance Options with Consolidation

You just lost your job and you’re calculating the previous forbearance time you’ve used on your loans. But wait—you consolidated. All forbearance and deferment time limits have been reset. You now have three years of general forbearance time available in 12-month increments on your consolidation loan.

It’s relatively easy to get forbearance on a consolidated loan—you

don’t have to call multiple servicers to get forbearance on each individual

loan. This saves you from possibly forgetting one loan and getting

a ding on your credit report, or worse, having your loan default

three to six months later. But in the spirit of maintaining your credit

scores, you still have to call your servicer to request forbearance and

wait to stop making payments until your forbearance has been

approved.

As I discussed in Chapter 2, you’ll want to save forbearance for when

you really need it. Once you’ve consolidated, unless you reconsolidate

with direct lending from another lender, request a new consolidation

because of addition loans or you won’t get any more forbearance time

added to your account.

Deferments have tougher rules for acceptance, but you can still get

one if you return to school or are active duty in the military and called

away to serve your country. You also get a brand-new, three-year term

for economic deferment. If you are working full-time and making less

than 150 percent of the poverty line in your state, can’t afford your payments,

or are in the Peace Corps, you can request an economic deferment

instead of forbearance. This way, if you have subsidized loans, the

government will pay the interest on the loan during your deferment

period.

Whether you utilize a deferment or forbearance, remember that your

loan amount will not decrease. In fact, you could end up owing thousands

more after a couple of years of forbearance because of accrued

interest. In order to negate this effect, try making small payments until

you get back on your feet.

What Is The Meaning Of Reconsolidating

Your eyes absolutely pop out of your head when you read over your

Loans chart from the National Student Loan Database and you realize

you consolidated and reconsolidated four times! What does this mean,

how did this happen, could you do it again if you so desired, and could

you get a better deal?

This is actually my situation. I consolidated my loans four different

times. The first time was for my initial undergraduate loans. The second

time was to include loans from when I returned to school to include the

remainder of my undergraduate degree. Then I did a mini-consolidation

of two loans right before an interest rate hike was expected in

order to fix the rate—this was before each federal student loan started

being issued at fixed interest rates. The final reconsolidation was right

after graduation for my first master’s to secure one of the consolidation

benefits before they ended in October 2007. I could still reconsolidate

one more time with direct loans, if the current program or a program

ten years from now with direct loans seems more beneficial for paying

off my loan faster.

Why might you want to reconsolidate?

If you decided to work for the government or a nonprofit business,

you could get on a plan where the rest of your loan would be forgiven

after 120 payments while working in a public service position for ten

years. It would also be a good option if you returned to school and

wanted one uniform payment. If you missed a loan and didn’t want to

lose out on benefits earned from a previous consolidation, this is not a

time to reconsolidate—at least until your benefit is earned.

There’s another situation where reconsolidation could be a good

idea: You consolidated before October 2007 with a consolidation benefit

of a 2 percent interest rate deduction after 36 on-time payments

and your new interest rate is secured for the life of your loan. You’d

rather have your consolidation loan with direct lending to make sure

your loan is never sold to another bank.

No matter what your situation is, weigh your options carefully and

reconsolidate when you are able to and when it makes sense for your

individual circumstances.

Stray Loans After Consolidation

All your loans are finally consolidated. Big sigh of relief—only one loan

payment to make. Time to pop the cork! But hold on to that little piece

of wood because you may need to put it back in the bottle for another

60 days. Why? One or more student loans were lost in the shuffle and

left out of the consolidation. How might this happen?

When you filled out your consolidation paperwork, you didn’t list

one or more of your loans. You may have forgotten about one or more

of your loans or didn’t know about them, or you compiled the list of

student loans from your paperwork for the loans you know about and

are making payments on, but forgot one of your bills.

The other way you could end up with one loan outside of consolidation

is through computer or human error. Double-check all of your

paperwork before consolidation. Also follow up with the new servicer

within a week or two of consolidating to make sure they show all of your

loans included in the process.

You may be able to catch the stray loan and get it into the consolidation

before the consolidation is complete. But if you don’t, you can

reconsolidate your loans, as discussed in the next section

How to Consolidate Your Loans

You’re ready to consolidate your loans, now you just have to complete

the process using the following steps:

1. Gather information on your loans. Grab the Personal Student

Loan chart you completed in Chapter 1. You will need to have the

following information on your open loans: the servicer, the interest

rate, and the loan status. Whether you consolidate with direct

lending or one of your current lenders, you’ll be asked for this

information online or over the phone for the following reasons:

• Servicer: The consolidator has to know who to contact to pay

off the old lender in order to transfer the loan.

• Interest rate: So your new interest rate can be calculated, your

new lender needs to know what all your old interest rates were.

Your consolidated loan interest rate is the weighted average of

your current loans.

• Loan status: You can’t consolidate a defaulted loan until you’ve

made payment arrangements with your guaranty agency and

followed the payment plan for at least three months. Unsubsidized

versus subsidized is also important for the loan status. If

you have both kinds of loans, you will have one consolidated

subsidized loan and one consolidated unsubsidized loan.

Finally, if your loans have already been consolidated, you can

reconsolidate only in two circumstances: if you have unconsolidated

loans to add into your consolidated loan, or if you are

reconsolidating into direct lending.

2. Fill out the forms. With direct lending, you can fill in all your loan

information online and e-sign the form. You can also print the

forms and mail them in. If you are consolidating with another

lender with whom you currently have federal loans, you should

contact them to ask whether applications are accepted online, by

mail, or by giving information to a representative over the phone.

Even if you are diligent, you still want to watch to make sure the

first payments post, especially if you filled out a direct debit form.

3. Don’t stop making payments on your old loans until you know

your consolidation is complete. This is the easiest way that good

intentions can go horribly wrong. You consolidate your loans to

make sure you never miss a payment, then you do miss a payment

while waiting for your loan to be consolidated. Wait until you have

some sort of written confirmation of your consolidation’s completion

and the date of your first payment before you stop making

payments on your previous loans.

4. Follow up, follow up, and follow up some more. Keep track of

your loan consolidation process by checking either online or making

a phone call every two or three weeks. If you forgot to sign

mailed-in forms or if there’s some other holdup, you want to know

right away what it is so you can fix it.

What Your Award Letter Means

The schools you included in your application will receive the results of your FAFSA. They will use this information and the cost to attend their institution to put together an award package for you which will include federal student loan and grant money you’re eligible for, state aid, institutional aid and other sources of aid to help pay your costs. Some schools might include private or commercial loans. Make sure you understand what you’re receiving and what the terms are

Every loan award package is individually tailored. Contact the school, your lender or the U.S. Department of Education, if you have any questions or need clarification. Everyone is here to serve you. You’re the customer and there are options out there for you.

Not all award packages are the same. You’ll receive different award packages from different schools.

Should I accept all the money included the award letter?

Only borrow what you need and what you’ll be able to repay. Remember that student loans have to be paid after your leave school, attend less than half time or graduate. When you receive your award letter, start by accepting scholarships and grants you’re eligible for—be sure you understand any conditions/requirements to receiving these “free funds.” Then accept the loans with the most comfortable terms; that is, federal student loans (subsidized and unsubsidized federal student loans from the federal government or guaranteed by the federal government), and state aid. If you see private or commercial loans in your award letter ask why this type of loan was included, find out the terms, and reject the private loan if the terms aren’t favorable. Exhaust all options before looking into private loans. Private loans and credit cards should be your last resort.

Before you accept any aid, you should

• get a breakdown of the direct expenses (tuition, room, board, and fees) and estimates of indirect expenses (travel, books, etc.) for one year of college;

• know the actual net amount (cost of attendance minus financial aid) that you’ll have to pay to attend one year of college;

• know what amount of awarded financial aid that doesn’t have to be repaid such as scholarships and grants and the conditions under which they are renewable each year;

• know the amount of work-study and the conditions under which one has to fulfill the work-study;

• find out which loans you’re eligible for;

• find out which loans your parents can get to help pay for your education;

• know the interest rates, loan terms, monthly repayment amounts, and total repayment amounts of your loans;

• know where you can get additional information or have your loan questions answered.

Always consider what you’ll have to repay. Repayment of student loans should only be a small percentage of your salary. If you expect to pay more than 15 percent of your annual salary for student loans, you might have difficulty making your monthly payments. Ask your school’s financial aid office for starting salaries of recent graduates in your field of study to get an idea of how much you are likely to earn after you graduate. Estimates of salaries for different careers are available in the Occupational Outlook Handbook at www.bls.gov/oco and research employment opportunities advertised in the area where you plan to live.

You should know the full cost of attendance for the total number of years you plan to attend school. This will give you an idea of the total cost of the federal student loans you may be taking out. Once you have an idea of the total amount you’ll end up borrowing, you can see what the estimated monthly payment amount will be under different repayment plans

Additional Loan Forgiveness Programs

Public service loan forgiveness is only the tip of the loan forgiveness

iceberg. There are numerous other programs that may give you money

to pay off your student loans. Unfortunately, though, some of these

programs could melt before you get a chance to use them, such as

state programs that depend on the money being available in your

state’s budget. Other programs, though not necessarily loan forgiveness

programs, are better bets because you can get the money up

front, such as companies you work for that will pay for your tuition

ahead of time or offer semester-by-semester reimbursement when you

return to school, making it easy to take out a loan and be reimbursed

within a few months.

Demystifying Loan Forgiveness Programs

Thomas L. Harnisch of the American Association of State Colleges and

Universities lets you know what you should be aware of if you have or

wish to utilize a loan forgiveness or tuition reimbursement program.

Myth: Loan forgiveness programs apply to all types of student loans.

Fact: It depends on the program. For instance, some federal programs

may forgive Perkins Loans, but not Stafford Loans. Private

student loans are often excluded from these programs. Choose a

loan forgiveness program based on inclusion of the type of loans

that you have.

Myth: You have to work for the government to qualify for a loan forgiveness

program.

Fact: Some corporations and nonprofits may pay for coursework relevant

to an industry, such as an MBA program. Check with your

supervisor and human resources department for program requirements.

You may have a tuition reimbursement program for returning

to school or a loan forgiveness program where you work right now.

Myth: The new programs are the most lucrative for paying off loans.

Fact: The U.S. military’s loan forgiveness program has been around

for decades and will currently pay back up to $65,000 worth of federal

student loans.

Myth: You have to be right out of school to enroll in a loan forgiveness

program.

Fact: Not always. It depends on the program requirements. You can

often enroll in a loan forgiveness program if you have been out of

school for a number of years.

Myth: State-funded loan forgiveness programs are reliable and can

assist with your loans when you graduate.

Fact: State-funded loan forgiveness plans are at the mercy of overstressed

state budgets. Some states have reduced funding to these

programs, while other states have discontinued programs entirely.

Myth: Once you are enrolled in a program, the amount of your loan

forgiven will not change from year to year.

Fact: Especially on the state level, as budget demands change, the

amount you are given for loan forgiveness can change.

Myth: You can’t confirm you’ll receive the money on any state loan

forgiveness programs.

Fact: There are both in-school and out-of-school programs. In-school

programs will pay for your schooling “up front” in exchange for a work

commitment after you graduate. On-the-job loan forgiveness does not

pay for schooling, but allows you to “work off” the student loans.

Myth: If a federal or state agency offers loan forgiveness programs,

you will automatically qualify if you get the job.

Fact: Not always. Check with the human resources department in

each agency, as these programs have different requirements for

each agency and job position. Some federal or state agencies may

offer generous forgiveness programs, while others may not offer any

programs.

Bottom line: As long as you know the restrictions and play by the

rules, loan forgiveness programs can help your financial bottom

line. Just make sure you are entering a career you love. Otherwise,

the partial or total forgiveness of your loans may not be worth what

you could be making, in a job that you might enjoy more.

Why get a federal student loan?

While every student wants scholarships and grants, not everyone can cover the entire cost of college or career school through those options. Loans can make your education possible and affordable. A federal student loan is a low-cost loan and a better option than a private student loan because:

Here are some benefits of federal student loan

1. You will not have to start repaying your federal student loans until you leave school, attend less than half time or graduate.

2.The interest rate on a federal student loan is fixed, currently at 6.8 percent, and almost always lower than on a private loan—and much lower than on a credit card!

3.Students with greater financial need might qualify to have the government pay their interest while they are in school. This is called a subsidized loan.

4.You don’t need a credit record to get a federal student loan (except for PLUS Loans for graduate and professional students). Federal student loans help you establish a good credit record.

5.You don’t need a cosigner to get a federal student loan.

6.Free help is available at 1-800-4-FED-AID.

7.Interest might be tax deductible.

8.Loans can be consolidated into the Direct or FFEL Loan Consolidation program that has comfortable repayment plans and other benefits. See www.loanconsolidation.ed.gov for more information.

Who can get federal student loans?

To be eligible for federal student aid, you must

• be a U.S. citizen or eligible noncitizen (for most programs) with a valid Social Security number (SSN);

• be working toward a degree or certificate;

• have a high school diploma or a General Educational Development (GED) certificate; pass an approved ability-to-benefit (ATB) test (if you don’t have a diploma or GED, a school can administer a test to determine whether you can benefit from the education offered at that school); meet other standards your state establishes that we have approved; complete a high school education in a home school setting approved under state law;

• register (if you haven’t already) with the Selective Service, if you’re a male between the ages of 18 and 25;

• maintain satisfactory academic progress once in school.

What types of federal student loans are there and how much can I borrow?

Types of loans:

• Federal Perkins Loans are:

--Made through participating schools to undergraduate, graduate and professional degree students.

--Offered by participating schools to students who demonstrate financial need.

--Made to students enrolled full-time or part-time.

--Repaid by you to your school.

• Stafford Loans are for undergraduate, graduate and professional degree students. You must be enrolled as at least a half-time student to be eligible for a Stafford Loan.

There are two types of Stafford Loans: subsidized and unsubsidized. You must have financial need to receive a subsidized Stafford Loan. Financial need is not a requirement to obtain an unsubsidized Stafford Loan. The U.S. Department of Education will pay (subsidize) the interest that accrues on subsidized Stafford Loans during certain periods. These loans are made through one of two U.S. Department of Education programs:

• PLUS Loans are loans parents can obtain to help pay the cost of education for their dependent undergraduate children. In addition, graduate and professional degree students may obtain PLUS Loans to help pay for their own education. These loans are made through both the Direct Loan and FFEL programs mentioned above.

• Consolidation Loans (Direct or FFEL) allow student or parent borrowers to combine multiple federal education loans into one loan with one monthly payment.

How do I apply? A Student Loan

As with all federal student aid

(grants,workstudy and loans),

you apply for a federal student

loan by completing the Free

Application for Federal Student

Aid (FAFSA). A separate loan

application isn’t required

There are Three-step process to apply

Step 1

Collect the documents needed

to apply. Although not all aid is

need-based, you’ll need to include

information on your and your

parents,’ if applicable, income tax

returns and W-2 forms (and other

records of income) to help determine what type of aid you should receive.

A full list of what you need is at www.fafsa.ed.gov. Tax return not completed

at the time you apply? Estimate the tax information, apply, and correct

information later. Complete the Free Application for Federal Student Aid

(FAFSA) at www.fafsa.ed.gov. Complete the FAFSA on or after Jan. 1

of the year you expect to start college. When you complete the application

online, you will have the option of receiving you personal identification

number or Federal Student Aid PIN. The PIN serves as your signature

and will give you access to your student aid records. Keep it to yourself

and keep it safe!

Step 2

Review the Student Aid Report (SAR)—the summary of your FAFSA.

After you submit your FAFSA, you will receive your SAR from the U.S.

Department of Education. Review your SAR, and if you make changes

or corrections, submit your SAR for reprocessing.Your complete, correct

SAR will contain your Expected Family Contribution (EFC)—the

number used to determine your federal student aid eligibility.

Step 3

Review your school’s financial aid award letter. Once you have been

admitted, the school(s) will send you a financial aid award letter that

lists the grants, scholarships, work-study, and loans for which you’re

eligible. The letters aren’t standard, vary in the amount of information

included, and are based on the school’s cost of attendance (all direct and

indirect expenses, including tuition, fees, room and board, books,

transportation, and supplies) minus the EFC.Some schools might include

optional private loans in your award letter. Before you accept any loans,

make sure you understand the source of your loan

(government or private) as well as the terms of the loan.

If your school participates in the Direct Loan Program, the U.S.

Department of Education is your lender. If your school participates

in the FFEL Program, the federal government guarantees loans

made under the FFEL Program but you’ll have to choose a lender

(either your own bank or one your school suggests) to fund your loan.

No additional applications are needed. Remember, you have the right

to work with a lender of your choice. You’re not limited to your school’s

preferred lender list because, either way, the federal government

guarantees your loan.

NOTE: Because some school and state student aid is also based on the

data you provided on your FAFSA and, because of funding limitations,

provided on a first come first served basis, submit your FAFSA as soon

as possible after Jan. 1 to be considered for this aid.

The Types of Loans

The federal government categorizes your loans in several different ways:

• Consolidated: This is a combined loan

from multiple semesters. For example,

if you consolidated loans after you completed

your undergraduate degree, you could have

eight semesters of loans in one consolidation loan.

• Subsidized: With a subsidized loan, the

government pays your interest while you

attend college and other special circumstances.

• Unsubsidized: With an unsubsidized loan,

you pay your own interest in all circumstances

• FFEL (Federal Family Education Loan)

Program: These loans are with a servicer

other than the government but they are federally backed loans and qualify

for most of the same repayment programs as direct loans. They can also

be consolidated to direct lending.

• Direct: This kind of loan is issued directly from the government

via direct lending as a servicer.

• Stafford: The most common type of federal loan, it can come in

many forms, such as consolidated or unconsolidated or subsidized

or unsubsidized. It can be serviced by either direct lending

or another servicer.

• Perkins: This category of student loans is fairly rare and is normally

reserved for low-income families. If you have these, you may

have additional options for loan forgiveness.

Checklist for Maintaining Consolidation Benefits

✓ Make all payments on time.

✓ Call your servicer when you can’t afford your payments to get a

temporary payment reprieve.

✓ Let your servicer know when you are returning to school and file

the appropriate paperwork.

✓ Be proactive and contact your servicer if you miss a payment to

reduce the chance of permanently losing your benefits.

✓ Don’t start making extra payments on this type of loan until you’ve

earned your benefits. Your payments to earn your benefit are

counted by a computer, and thus could get confused by payments

not made within the grace period or extra amounts added

to your regular payments.

✓ Once your benefits are earned and irrevocable, that is the time to

make extra payments on your loans.

What is Student Loan Consolidation?

Though the loan consolidation process and its terminology can be

complex and confusing, the basic concept is easy to understand: You take all of your outstanding federal student loans (even if it’s just one loan) and bundle them into one new student loan with one monthly payment. The new rate is fixed—meaning it won’t change—and the length of the loan can be extended all the way up to 30 years, which can lower the amount of your monthly payments. It’s a kind of refinancing of your federal student loans.

Student loan consolidation has grown significantly during the last

several years. Students and their families have had to take on more

financial burden due to a combination of steep increases in tuition

(annual costs rose 35 percent during the last five years) as well as

a decline in the amount of federal and state financial aid, including

grants, to students. Put another way, this new era is being called “debt

for diploma.” In turn, loan consolidation has become such a viable and

necessary option that some 2.5 million students consolidated their

loans in 2005. The U.S. Department of Education predicts that nearly as

many students will do the same in 2006.

What Are the Pros and Cons of Federal Student Loan Consolidation?

There are many good reasons to consolidate your student loans. However,

there are other factors that borrowers will need to consider before making

their decision.

First, on the positive side. You’ll simplify your life with one monthly payment

that will come from one lender (and one point of contact if you have

any questions). Because you are extending your loan’s term (or how many

years it’s going to take to pay back your consolidated loans), your monthly

payment will be lower. That’s where the term “payment relief” comes from.

Loan terms range anywhere from 10 years all the way up to 30 years. And

the interest rate on a federal consolidation loan is fixed—which is unlike

variable interest rate loans that can change. Your consolidated loan’s interest

rate will be equal to the average of all the student loans you want to consolidate,

which is then rounded up to the nearest 1/8 percent. The maximum

rate your loan can be is 8.25 percent.

Introduction.......

When you first get started college, student loans may have seemed like a

gift to help you get through school. However, your gift was borrowed

money. I knew my student loans were borrowed money, but I never

thought about how I was going to pay them back. I just assumed that

when I got a grown-up job, the money I made would easily allow me to

make the payments every month without affecting my lifestyle in any

way. The debt crept up on me, one semester’s worth of loans at a time.

Some semesters my loans totaled around $1,000; other semesters I

totaled over $7,000 of borrowed money. After a bachelor’s degree and

two master’s degrees, I racked up $65,000 in student loan debt.

Even though it was consolidated at a low 4 percent interest rate,

it will still take 30 years to pay off, at $310 a month.

Those of us with mountains of student loan debt are not alone.

Based on data from the National Center for Education Statistics, there

are over one million graduates who have at least $40,000 in student

loan debt in the United States alone.

If everyone in this predicament who has 25- and 30-year loan terms

waited until these debts were paid off to start families, save for retirement,

or move out of their first apartments, no one would ever leave

their matchbox-sized apartment or get married!

But most of us are not going to wait until middle age to start living

our lives, nor should we. Since we are going to have our student debt

around for up to 30 years, we need to learn to manage our payments

as another bill we have to pay, similar to an electric bill or a rent payment.

You can manage your student debt while maintaining a lifestyle

that is productive in the grand scheme of a financially secure future.