Young Person's Guide to Private Loans Consolidation - grown-ups, take a look, too.
I just can't stand an urge to share with you a *very* detailed, simple and explicit article on reconsolidation private loans matters.
I'd call it a Young Person's Guide to Private Loans Consolidation - so thoughtfully and friendly this little FAQ on private loans consolidation is written.
Discussed are private loans of all kinds - mostly student loans, information should be very heplful for students indeed.
Highlights:
* Real Life Example "Paying Ahead"
* Managing Student Loan Repayment
* Avoid Delinquency, Default & Bankruptcy
...and virtually everything else - it's a condensed wisdom, if you ask me...Kudos to Patti Corjay for putting it up.
In particular, part about paying more than the required payment will save money was an eyeopener for me - paying just extra $25/mo would save me 5 (five) grands in interest - how's that?!
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Borrower rights and responsibilities
What are loan terms and conditions?
What is the cost of my loan?
Managing your loans in repayment
Private Loan Consolidation
Post-MBA Strategies
Overview
Borrower Rights
o Written information on loan obligations
o An explanation of default and its consequences
o A copy of your promissory note and return of the original note when the loan is paid in full
o Prior to repayment, balance information, interest rates and fees and a repayment schedule
o Notification if your loan is sold
o Prepay your loan early without penalty
Borrower Responsibilities
o Repay the loan according to the schedule you select, even if you do not complete your academic program, are dissatisfied with the education you received, or you are unable to find employment after you graduate
o Notify your loan servicer of anything that affects your ability to repay the loan
o Notify your loan servicer of any changes in your status, including when you graduate
o Notify your loan servicer and school of any changes to name, address, and phone numbers
o Notify your loan servicer if you fail to enroll for the period covered by your student loan
Terms are the specifications identified in the promissory note that define the loan amount, interest rate, length of time in which to repay the loan (repayment term), and any other enforceable agreements entered into by the borrower and the lender before the loan will be made.
The loan terms stated in the promissory note will also include information on how interest is calculated and all conditions of repayment.
o Interest is generally calculated using the daily simple interest method
What are terms and conditions?
Conditions are the circumstances and “rules” the borrower agrees to abide by in exchange for the lender advancing the loaned funds applied for. Lenders in general will not release any funding until all conditions have been met by the borrower and cosigner, if there is one involved.
Examples of loan conditions are
o Borrower must agree to sign the promissory note before funds will be released
o In exchange for the cash provided by the loan, the borrower promises to repay in accordance with the terms set out in the promissory note
o Borrower agrees to use the loan for the purposes stated
o If the loan is not repaid according to terms, borrower agrees to pay various fees and court costs if incurred for the lender to get repaid
What are terms and conditions?
A price which is charged and paid for the use of money over time.
An interest rate is most often expressed as an annual percentage of the loan principal.
May be fixed or variable over time
o Fixed interest is a constant rate charged over the term of a loan
o Variable interest changes according to various schedules over the term of a loan.
Most private loan lenders have variable interest rates
Interest rate
Variable interest rates are generally used by lenders to help them maintain net interest income margins over the expected life of a loan.
A private loan borrower should be aware of the type of interest used by a lender and how the interest rate is determined.
Most variable rates are tied or indexed to a major commercial rate such as Prime or Libor.
o The prime rate is the interest rate that most commercial banks use to lend to their most creditworthy borrowers .
Private loan interest rates are generally stated as
o PRIME (Or Other Rate) Plus/ Minus an interest rate factor
o Example 8.25% +/- 2.0%.
Interest rates - Variable
The addition of accrued and unpaid interest to the principal balance of your loan.
o The less frequent the better.
o Read your promissory note to determine when interest on your private loan will be capitalized.
o Preference should be only once at repayment.
Capitalization
Grace period:
o Time interval between leaving school and the date that repayment begins. Six months is the grace period on most private loans.
o The grace period on your loan was created to give you a reasonable amount of time to transition from the academic world into the job market.
o Assess your financial situation and prospects
o If you think you have a financial problem at the beginning of repayment, anytime during repayment or your circumstances change, contact your loan servicer. Many times they can help.
Repayment terms
Repayment terms and options:
Variations of the loan repayment terms that may be chosen under certain conditions to assist the borrower in making their monthly payments
Typically repayment options will involve alternatives for:
# Length of time to repay the private loan
# Application of the monthly payment to interest and principal
Typical repayment term options
o 10, 15, 20 or 25 year repayment term
o Interest only followed by a standard payment schedule
o Most common option offered by a private loan lender is a 10 or 15 year repayment term
It is very important that you read your promissory note to understand the repayment options available to you
Repayment terms
Monthly payment:
Minimum amount that a borrower is required to pay each month.
When the payment is received by the loan servicer, the payment will be applied first to the interest that has accrued since the last payment and the remainder of the payment will be applied to reduce the loan principal amount.
Payment due date:
o This is the date each month by which a private loan borrower is required to make the monthly payment.
o Failure to make payments on time can result in late fees, collection calls and if not made over a period of several months, legal action.
Repayment terms
Repaying your student loans responsibly is one of the most important behaviors you can develop as you enter and grow in your career.
Failure to live by the terms of your promissory note and make your payments on time will carry serious consequences that will be difficult and costly to overcome. Contact your loan servicer immediately to work on possible solutions if you are having problems making your loan payments.
Nobody wins if you default on your loans.
Managing your loans in repayment
Managing Student Loan Repayment
Help your loan servicer keep track of you.
Your loan promissory note - a promise to repay on time and in full.
Failing to repay will put you in financial default.
If you’re having problems repaying, call your servicer - right away.
Alternate repayment plans can significantly reduce the amount of your monthly payment.
For Sallie Mae borrowers, go to www.SallieMae.com
Borrower benefits are options that lenders may offer as an incentive to borrowers
o to obtain their private loans through that lender
o use select services offered by the lender
Borrower benefits save you money!
Benefits could include:
o Borrower friendly capitalization policy
o Combined billing for multiple loans when in a repayment status
o Opportunity to release the co-signer from further obligation after a period of on-time payments
o No pre-payment penalties
Borrower benefits
Trouble Making Payments?
Call your loan servicer or lender right away
Explore your options
o Lower your monthly payment
+ Graduated repayment
+ Income-sensitive repayment
o Temporarily postpone your payments
Forbearance is an authorized interruption to your repayment schedule which allows you to suspend payment of principal, interest or both for a period of time
o Forbearance must be requested by the borrower and approved by the lender
o Interest accrues during periods of forbearance and is capitalized at the end of the forbearance period
o Must reapply with lender at the end of the period of forbearance if you wish to continue to remain in a forbearance status.
Forbearance
What If You Become Delinquent?
* Call your lender or loan servicer immediately and ask for help!
* Your servicer will contact you.
* Your late payments will be reported to a credit bureau.
* Delinquency will become part of your financial history.
What If You Become Disabled Or Die?
Private loans seek settlement from the borrower’s estate or co-borrower
What If You Default?
You could incur collection costs and legal expenses
Your credit history will be tarnished for a long time
Avoid Delinquency, Default & Bankruptcy
o Stay in control of your credit from the start.
o When trouble arises, take action - immediately!
o Seek professional assistance from your local Consumer Credit Counseling Service (CCCS) - 1-800- 388-2227 - It’s a free service!
o A financial planner can help develop a money management strategy for a fee.
What is private loan consolidation?
Paying off one or more private loans with one new private loan.
Relatively new financial planning and debt management tool for borrowers with private education debt.
Some similarities with federal consolidation but many important differences.
Private loan consolidation
Why private loan consolidation?
For convenience
o One payment
o May be combined billing with payments on federal loans if all loans with the same servicer (check with servicer)
To lower monthly payments
o May be able to extend repayment length, depending on amount borrowed
In some cases, to get a lower interest rate
o Depends on credit score of borrower and cosigner, if applicable
o Reminder that private loan consolidation does not offer a fixed rate
Private loan consolidation
Who is eligible?
Creditworthy borrowers with at least one private loan
Requirements may vary by lender
Other requirements may include:
o U.S. citizen or eligible permanent resident with SS number
o Private loans in repayment status
o Minimum loan amount
o Completion of program or degree
Private loan consolidation
When to consolidate
Check with lender, but likely during repayment, after grace period has ended.
Borrowers will forfeit grace period on underlying loans if they consolidate too early.
Private loan consolidation
Should you reconsolidate?
Borrowers can reconsolidate private loans
May not be in borrower’s best interest, if fees are involved
o May have already paid fees
Private loan consolidation
Questions to Ask:
* Which loans are eligible?
* What is my new interest rate and are there any fees?
* What are my grace and forbearance options?
* What are my repayment options?
* What are my monthly payment and total repayment amounts?
* Is there a penalty for early repayment?
* Who will service my consolidation loan?
* How long will this take?
* What about spousal consolidation?
Private loan consolidation
Post-MBA
Money & Debt Management Strategies
Develop A Budget
List all sources of income
Adjust for taxes, FICA and other withholding
Divide by 12 for monthly income
Deduct housing costs
Deduct food and clothing (laundry, too)
Deduct utilities (gas, phone, electric, etc.)
Deduct credit card payments, if applicable
Develop A Budget
Deduct transportation expenses, including car expenses (also gas and insurance), if applicable
Deduct entertainment expenses
DEDUCT YOUR STUDENT LOAN PAYMENTS!!
Remember to pay yourself (IRA, savings)
The remainder should be greater than zero (some left over for emergencies)
Paying more than the required payment will save money.
For a $50,000 student loan*, with a 15 year repayment term:
o The monthly payment will be $545
o Total interest will be $48,096
However...
o an extra $25/month will save $5,387 in interest
o an extra $50/month will save $9,595 in interest
o an extra $100/month will save $15,805 in interest
o a double payment/month will save $34,366 in interest
* * Based on an interest rate of 10.25%
Real Life Example– Paying Ahead
Which Option Is Best For You?
Do your education loan payments exceed 8-10 percent of your gross monthly income (and you’re having trouble making payments)?
o 8-10 percent rule should allow borrowers to have enough income to cover rent/mortgage payment, pay for basic living expenses, and meet other debt service needs
Annual Monthly Maximum Student Loan Payment at
Income Income 8% 10% 15%
$ 50,000 $4,167 $333 $417 $ 625
$ 75,000 $6,250 $500 $625 $ 938
$100,000 $8,333 $667 $833 $1,250
What About Deducting The Interest?
Tax rules are a bit complex, so contact a tax preparer to determine if you can deduct interest for private education loans
Patti Corjay
Director, South Sales
Graduate and Professional Programs
April 2007
