A Personal Look at Student Loans
A couple weeks after my college graduation, I felt as if I'd stepped five years back in time. Now that I was officially a college graduate, my student loans would become due and payable in about six weeks and, especially with all the new legislation, I found that I needed to learn about student loans all over again.
I remembered most of the decision-making that had gone into the choices my parents and I made about financing my education. My grandparents had saved some money to go toward my education and my parents worked out what they could contribute. I completed the Free Application for Federal Student Aid (FAFSA) and learned about the loans for which I was qualified.
I applied for financial aid from my chosen school and from a few private scholarship funds. Unfortunately, the amount I was awarded from my school wasn't nearly enough to fill out what I needed from a complete financial aid package, and none of the private scholarships came through. I filled out the application for the unsubsidized Stafford loan which left only the extra expenses such as books, lab fees, parking and a few others items for me to worry about.
My parents and I discussed several options for covering these last remaining obligations. We especially needed to round out my financial aid package to cover the expensive travel courses my major required. My parents looked into a home equity loan, but they really didn't want to make extra payments on top of what they'd already be paying for monthly tuition. Instead, we opted for a small private student loan that would meet all of my remaining financial needs. Though I knew I would have to pay a higher interest rate on the private loan, it freed us from making payments while I attended school and offered a lot more flexibility in how I used the funds.
Now, five years later, I'd benefited from all that careful planning, but it was time to begin making payments on what I had borrowed. I needed to make informed decisions once again in order to minimize my interest while still affording my monthly payments.
Because I had one Stafford student loan and one private student loan, consolidating the two made little sense, because I would lose the advantageous rate of the Stafford loan. First, I studied what both payments would be without any refinancing. The monthly payment amount on the small private loan seemed manageable, but the larger payment to my Stafford loan concerned me.
I knew Congress had repealed the single holder rule on July 15th of 2006. The rule had stated that if a student had all their Federal Family Education Loan Programs (FFELP) loans through a single lender, that lender would be their only option for consolidation. What this rule would have meant for me was that I would have been able to refinance my Stafford loan only through the original lender. Because the rule had been repealed, I could now choose any lender to refinance my loan.
Comparing several lenders, I found that a few offered incentives beyond a longer repayment term. Many offered a .25% reduction to the interest rate in exchange for setting up automatic billing from a checking account. A 1% interest rate reduction was also available after several months of on-time payments, depending on the lender. A few offered loan fee rebates, or even a reduction of the total loan amount, to those choosing to consolidate with them.
After working out the numbers, I opted for a lender who would let me extend my repayment schedule to 15 years and give me a 1% reduction in my total loan amount as a bonus for getting my business. This company also offered both the automatic debit and the on-time payment interest rate reductions.
Just to make sure I was being as wise as possible, I looked into options for refinancing my private student loan as well, but the same incentives were not available from the private lenders. Also it seemed I'd only be piling additional fees on top of what I already owed. That, plus the fact that prime rate had risen since I'd financed the private loan, made it an easy decision to stick with the terms I already had.
A few days later, while I was having dinner with my parents, I explained my refinancing decisions to them. My father was impressed with the research I'd done. He commented that I must have learned something from college. While that was true, I knew now these decisions had less to do with what I'd learned in five years of school and more to do with what I'd learned in two weeks of the real world.