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Feeling burdened by a variety of financial obligations left over from your years in school? Confounded and perplexed by education financing and repayment? The federal student loan consolidation program can help reduce your anxiety, clarify the landscape of your financial responsibility and enhance your peace of mind. Consolidation enables a borrower to combine some or all of a borrower’s federally guaranteed student loans into a single new loan with one monthly payment. When a consolidation loan is issued, the lender pays off all outstanding balances on the loans eligible for consolidation. Consolidation may also allow a borrower to extend repayment over a longer period, resulting in lower monthly payments. WHO’S ELIGIBLE To be eligible for a consolidation loan, a borrower must have outstanding loans in one or more of the following student loan programs: � Stafford loans. � Parent Loans for Undergraduate Students (PLUS). � Supplemental Loans for Students (SLS). � Perkins loans. � Federally Insured Student Loans (FISL). � Health Professions Student Loans (HPSL), including Loans for Disadvantaged Students (LDS). � Health Education Assistance Loans (HEAL). � Nursing Student Loans (NSL). � Auxiliary Loans to Assist Students, made before Oct. 17, 1986. INTEREST RATES A consolidation loan has a fixed rate of interest, which is the lesser of 8.25 percent or the weighted average of all loans being consolidated, rounded up to the nearest one-eighth percent. Due to numerous rate cuts by the Federal Reserve this year, student loan interest rates have dropped to their lowest level in the 35-year history of the student loan program. On July 1, interest rates on variable-rate Stafford loans were reduced. Rates now range from 5.99 percent to 6.79 percent, depending on the type and origination date of the loan. Like Stafford loans, many student loans have variable interest rates. These rates are determined during the final week of May and are adjusted each summer on the basis of the 91-day Treasury bill rate. But when loans are consolidated, the new loan has a fixed interest rate. This fixed-interest feature makes consolidation worth considering, since it enables borrowers to lock in what are historically low interest rates. NO ‘SECOND BITE AT THE APPLE’ Should you decide to consolidate, know that you can’t do a subsequent consolidation in an attempt to take advantage of interest rates if they continue to drop. You should carefully consider when to use the onetime opportunity to consolidate. If you can comfortably afford monthly loan payments right now, you may want to defer consolidation for the time being. While waiting, a borrower still will benefit from the current low interest rates. Borrowers have until June to make a final decision regarding consolidation: If the May Treasury auction indicates that loan rates will rise in July, a borrower then can elect the consolidation and can lock in the lower 2001 rate. A word of caution: Consolidation lenders have different policies concerning when rates can be locked in, and this is an important factor that must be assessed when considering this wait-and-see strategy. If you are still in a repayment grace period (which is usually during six months after graduation), you should consider consolidation. The accrued interest rate is usually one-half percent lower than it will be at the end of the grace period, which would lower a weighted-average computation. But implementing a loan consolidation terminates the borrowing grace period and accelerates repayment of your loan. If you still aren’t convinced that consolidation is for you, consider some of its other advantages: It can reduce your monthly cash outflow. With a reduced monthly loan payment, you can use your additional cash to pay down credit card debt, which is probably at a higher interest rate, or meet other needs. Additional cash flow could also have a favorable impact on your creditworthiness, since mortgage applications and loan formulas are calculated using monthly cash outflow figures. It simplifies your paperwork. One monthly payment to one lender can significantly reduce your record-keeping and check-writing responsibilities. In addition, there are generally no fees or credit checks associated with a loan consolidation application. Consolidation offers tax advantages. Tax legislation enacted in June permits student loan interest to be deductible even when it is paid beyond the first 60 months; this was limited under prior tax law. Other tax enhancements will become effective next year, like deductible student loan interest. Increased income phase-outs have made this possible. � Consolidation can also buy you access to other incentives from lenders, such as the following: � The flexibility of alternative repayment options (using equal, graduated or income-sensitive payments). � Interest-rate reduction (sometimes one-quarter percent) for repayments through an automatic transfer from your bank account. � Interest-rate reduction for consecutive on-time payments, usually over a three- or four-year period (e.g., 1 percent). DISADVANTAGES Although loan consolidation offers some great features, there is a downside. It will increase your total student loan interest costs because of the extended repayment period. Depending on the loan balance and interest rate, interest expense could increase appreciably. You may have to forgo deferment and forbearance options, depending upon the lender and the dates and types of the loans that are consolidated. Your consolidated loan may have a slightly higher interest rate because of the rounding component of the weighted-average formula used to calculate it. Interest subsidy benefits may be forgone for loans included in a consolidation package except for subsidized Stafford loans. For this reason, you may want to exclude Perkins loans from consolidation if you plan to return to school after consolidating. If you are married, you may consolidate only if both you and your spouse agree to be held liable for the repayment of consolidation loans. This obligation survives, even if you later divorce. Once you’ve decided to consolidate, you must determine the current balances and interest rates on all loans you want to include in the loan consolidation. You can find this information in your lender statements or by directly contacting your current lenders. Choosing a consolidation loan lender requires research. There are many lenders from which to choose, and you’ll want to locate the loan program that’s most advantageous for your situation. But once you find a lender, applications can often be accessed online and generally do not take a long time to complete. Upon execution of the new promissory note, the consolidation lender will remit payment to all existing lenders to pay off those loans in full. The borrower will then receive a new repayment schedule and disclosure statement from the consolidation lender. Generally, the first consolidation loan payment is due within 60 days after the loan is disbursed. We hope this has heightened your awareness about the opportunity of student loan consolidation. While it will take some initial effort on your part to gather information, conduct research, perform analyses and assess alternatives, it most likely will be worth the effort. Hal S. Hershgordon is a private client adviser with Deloitte & Touche. He provides personal financial counseling and advice in areas including estate planning, investment, income tax, retirement, risk management and philanthropy. Richard J. Williamson is an employee benefits tax consultant with Deloitte & Touche. He concentrates his expertise on the design, implementation, operation and annual reporting of qualified and non-qualified benefit plans.

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