Uncle Sam Offers New Deal on Student Loan Payments

Tired of sending off multiple payments every month to feed your assortment of student loans? Frustrated that these loans don’t reflect today’s low interest rates?

Well, the federal government has a deal for you.

From now until Jan. 31, the U.S. Department of Education will allow some students and virtually all former students to consolidate their loans into one neat bundle--at a specially reduced interest rate of 7.46%. And if you stretch out the years to repay the loan, you can lower your monthly payments.

The new program was launched earlier this month when President Clinton signed the bill that extended the Higher Education Act for another five years.

The new interest-rate formula is expected to save borrowers about $11 billion over the next decade. That translates into about $700 for the average borrower with $13,000 in outstanding loans.

“This is a great deal for students and graduates,” said” Ivan Frishberg, director of the U.S. Public Interest Research Croup’s higher education project. “The only problem is there isn’t much time to do this. People should act quickly.”

Here are the basics as outlined by U.S. officials and other student-loan experts:

What does it mean to “consolidate’?--It means combining some or all of your loans into one. Consolidation may extend your repayment period, end the hassle of dealing with multiple lenders and allow you to repay your loan as a share of your income. Usually, it means you get a break on interest costs.

Why should I apply now?--Congress limited the offer to those who apply before Jan. 31, 1999. If you meet the deadline, you will receive a lower interest rate for the life of your loan--a rate that beats those on most existing Direct and government-guaranteed loans. If you miss the deadline, you can still consolidate your loans, but the new rate will be a “weighed average” of the rates on your original loans. This formula raises the cost of consolidation loans for most borrowers.

How long will the initial Interest rate of 7.46% last?--Until July. It’s a variable interest rate that is recalculated each year, but it will be based upon a lower interest-rate formula for the life of your loan. And it will never be more than 8.25%.

Who is offering such a deal?--The U.S. Department of Education’s Direct Loan program, as well as some private lenders participating in the department’s government-guaranteed loan program, called the Federal Family Education Loan (FFEL) program.

How do I apply for a direct consolidated loan?--You can call the Education Department’s Direct Loan Origination Center at (800) 557-7392 from 8 a.m. to 8 p.m. EST and ask for a loan application to be mailed to you. You can also download an application from the Education Department’s Web site www.ed.gov/DirectLoan (please note the two upper-case letters). The Web site also offers more details.

Are there other options?--Yes, many private lenders don’t want to lose their business as borrowers trade private loans for consolidated government loans. So, some are matching the Direct Loan program’s lower interest rate. Others are pushing their own special deals. For instance, Sallie Mae, which owns or services a third of the nation’s student loans, offers a 0.25% interest-rate break if you tie your loan payments to your checking account and will offer a 1% to 2% rate cut if you make 48 consecutive monthly payments on time.

How long would the process take?--A typical loan consolidation takes 60 to 90 days to process.

Is loan consolidation the best way to go?--That’s a personal choice, of course. Private lenders point out that you may end up paying more in interest over the long run if you stretch out your payments. Say you have a loan balance of $15,000 at 8.25% interest that must be repaid in 10 years. That will cost you $7,078 in total interest during the decade of payments. If you reconsolidate the loans and extend the repayment terms to 15 years, it would cost you $9.958 in interest--even at the lower rate of 7.46%. But consumer advocates say it’s better to take advantage of the lower rates, and then add some extra money to each payment so you can pay the loan off quicker.

How can I tell what’s best for me?--One way is to calculate repayment schedules and interest payments through online calculators available on various Web sites. The Education Department’s site has such a calculator to help you make an informed decision. Other online calculators are available through the www.finaid.org Web site maintained by the the National Assn. of Student Financial Aid Administrators.

What if I’m still in school?--You cannot obtain a direct consolidation loan before Feb. 1,1999, if you have an outstanding FFEL or Perkins student loan. Only students with Direct Loans can take advantage of the lower rate.

What else do I need to know?--You must include at least one Direct or FFEL loan in your consolidation, but you do not have to include ail your student loans. You may also consolidate a single loan or an existing direct consolidation loan. There is no consolidation or refinancing fee and no minimum or maximum balance. And, you can pay off your direct consolidation loan at any time.