Student loan assistance

September 3, 2006 12:13 AM

My sister just graduated with a J.D.... accompanied by five student loans totaling over $100K. Recommendations for paying the least amount of interest possible?

I want to help her out. My question: These firms that consolidate student loans seems to be a good deal--what is the catch? Any recommendations with loan consolidationg companies, or are these guys a bunch of scheister? Is the standard interest rate a variable one, with a one-size-fits-all interest rate, despite credit ratings? What questions should she ask lenders?

posted by paulino636 to work & money (10 comments total)

I had the same problem when I graduated ... only worse. my advise is to consolidate all loans into one. check to see who offers the least penalties for paying off early, compare rates, work out a schedule. this is serious work and you should talk to a financial advisor if you are not sure whether you (or she) can see through it. there is no shame in asking for help when you are dealing with people who do this for a living. they have an advantage here.
posted by krautland at 12:23 AM on September 3, 2006

oh, also:

there is a good story in todays weekend wall street journal called "Where to find help in paying off college loans."

it's on the bottom of page B1 in the issue of saturday-sunday, september 2 -3, 2006 and it's hidden behind the online paywall.

it's a buck and if you're not reading the WSJ you should anyway. it's a good paper if you ignore the op-ed page.
posted by krautland at 1:09 AM on September 3, 2006

On consolidation - the govn't subsidises the consolidation of certain types of student loans, which results in private lenders being able to offer very low interest rates. This is where a lot of "too good to be true" offers come from. I was able to consolidate appx. $15k at a fixed 2.63% interest rate (!) a few years ago, so I'm just paying that off as slowly as I can. As for private loans, I have no idea. I'm just paying mine off as fast as possible (currently at 7.7% and variable, ouch).

Depending on her current income levels, you might want to look in to a deferment. I'm not sure what the eligibility requirements are for this, but I think you can get away with just paying interest or possibly nothing for some period of time.

I would also say that current economic conditions probably indicate rising interest rates over the next 5 years, so that should influence any decisions about paying off / consolidating now vs. later.

I am neither a psychic nor licensed anything; YMMV, TANSTAAFL, etc.
posted by 0xFCAF at 2:37 AM on September 3, 2006

I read somewhere that you should pay off your smallest loans first, and that reduces the total amount of interest you end up paying. it seemed kind of counter-intuitive to me, but supposedly it works.
posted by gilsonal at 6:44 AM on September 3, 2006

It's important to know whether or not she has private or federal loans. It's also important to know whether or not she's going into well-paid private practice. If she is, she'll be ineligible to deduct student loan interest and there are a lot of other strategies that might be appealling. I was in that position, and rolled over a sizable chunk of my federal loans onto a fixed-for-life credit card, 150 basis points cheaper than the best consolidation rate then available to me. As a bonus, had I had a run of bad luck and had to declare bankruptcy, the credit card balance would have been eligible for discharge, which student loans are not.
posted by MattD at 6:57 AM on September 3, 2006

If she has federal loans, definitely consolidate first, b/c interest rates are probably going to keep going up for a while so you should lock in a good one while you can (private loans can be consolidated at a fixed interest rate). Also look into whatever interest deductions her lender might offer for automatic debit and X number of months of ontime payments (I think I get a 1/4% deduction for auto debit and will get another 1% deduction after my 33 months is over from Sallie Mae - this is only on my federal loans).

It's my understanding that even if you consolidate private loans, you still end up with a variable interest rate and anyone who offers otherwise is probably somewhat sketchy, but I didn't put too much research into that, so I could be wrong.

Also, I'm not sure about the paying off your smallest loans first, it would seem to make more sense to pay off your loans with the highest interest rate first b/c of interest capitalization, etc. And actually, that reminds me that one of the most important things to do if you're paying extra every month is to specify to the lender that you want that amount applied to outstanding principal and not either future payments or interest, which is what they tend to automatically do in order to screw you over!
posted by echo0720 at 8:57 AM on September 3, 2006

Oh, one more thing...if she has Perkins loans, she probably shouldn't try to consolidate them into her federal loans, they're fixed at 5% and would only bring up the average, so it's not worth it.
posted by echo0720 at 8:58 AM on September 3, 2006

If she lives in or went to school in Ohio, StudentLendingWorks.org offers the best rates possible do to somes sort of official non-profit lender status with the State of Ohio.

Disclaimer: My employer manages the website.
posted by Mick at 2:33 PM on September 3, 2006

*due
posted by Mick at 2:33 PM on September 3, 2006

Consolidate all of her federal loans into one fixed rate loan, no idea what the interest rate will be now, around 5-6%? Pay that loan off the SLOWEST over as many years as they will let you, its the cheapest money she will ever borrow. The reason people like to consolidate these loans and keep sending you crap to use them is that the loans are guaranteed by the government, so the loan company you use isnt going to lose any money if you dont pay them.

Then look at her private loans, I assume with 100k in debt she has a bunch of private loans as you can only get so much from the government. You CANNOT consolidate these loans with federal (stafford, perkins etc) loans, and I dont think it is possible to get one with a fixed interest rate if she didnt agree to one when she made the loan. I have about 30k in private loan debt, and the rate has hiked from 7.5-8.75 in 2 years, icky.

You can "consolidate" these loans but what that really means is that instead of sending in one check for each loan (usually a different loan per school year, and the rates can fluctuate between them) you send them one lump sum and they apply a percentage to each loan you have. It is not the same as federal consoldiation.

You should use a debt repayment scheme called the snowball debt scheme. http://en.wikipedia.org/wiki/Debt-snowball_method (see the links to calculators at the bottom)

Figure out what the rate is on each loan, and put the highest interest rate first, then in decending order. Then figure out what the MINIMUM payment you can make on each debt is, for your federal loans with a 5% rate or something get a 30 year repayment scheme so that your monthly rates are lower. If you take the full 30 years to repay it you will be spending much more on interest than a 10 year scheme, but the point of the snowball method is that you spend the least possible on your low interest loans and spend the extra money on your high interest loans, paying them off faster but still spending the same amount each month. Spending an extra $100 a month on a 8% private loan will help you more in the long run than an extra $100 on a 5% federal loan.

Now comes the hard part, figure out how much you can spend each month paying off your debts. Say you can afford $800 a month, and your MINIMUM payment total of all your loans is 625. You put the extra $175 a month towards whichever loan has the highest interest rate, paying it off much faster than you would if you only paid the monthly minimum. Once that loan is gone you still have $800 a month to spend on loans, but with one less loan you have to repay you might have $275 extra each month to apply to the loan with the next highest interest rate. Rinse and repeat until you are out of debt! Then finance a car and get a mortgage and the fun starts all over again!
posted by outsider at 3:09 PM on September 3, 2006