Consolidating student loans can be complicated

By Christina Littlefield

Wednesday, June 16, 2004 | 9:02 a.m.

Recent UNLV graduate Daniel Spath has commercial mailers from federal student loan consolidation companies plastered across his refrigerator.

Nearing the end of his six-month post-graduation grace period, Spath, 24, has been getting the mailings two to four times a week from various companies for the past year.

Spath, who received double bachelor's degrees in math and economics from the University of Nevada, Las Vegas, is now trying to figure out whether he wants to consolidate or not, or which company he wants to consolidate with.

There's a lot for him to consider: whether or not he wants to include his wife's loans with his, whether to include his higher interest rate Perkins loan with his lower interest rate Stafford loans, or whether he should wait to consolidate until after graduate school.

The plethora of mailings don't help, Spath said, as many companies appear to be promising interest rates or savings that don't apply to his loans.

Spath is one of many recent college graduates who may be finding themselves inundated with mass mailings from loan companies in a market so competitive that many student loan experts are warning borrowers to beware.

With student loan interest rates set to hit a 39-year low July 1, now is a great time to take advantage of the federal student loan consolidation program and lock in rates as low as 2.88 percent.

But it's also an easy time for borrowers to be sucked into a consolidation package that may not be right for them, loan experts said.

The U.S. Education Department has not yet found any company to be scamming students, but some of those doing the mailings are less than reputable, loan experts said, and try to draw students in by offering false incentives or even claiming to be from the federal government.

"I don't even know if they actually care if you graduated or not," said Spath, who has about $18,000 in federal loans, about $4,000 more than the average undergraduate at UNLV. "I think they just send them out to anyone who has student loans."

In addition, student borrowers must consider whether consolidation is right for them at this time. The benefit of consolidation is that it allows students to lock in a fixed monthly rate and extend payments over a longer period, making payments more manageable. But this also means that students will pay more in interest over the life of the loan.

"I know in this low-interest rate environment it may seem like a no-brainer to consolidate, but there are some things to consider," Tom Joyce, vice president of corporate communications for Sallie Mae, said.

Consolidation interest rates for Stafford loans, the most common type of federal student loan, will drop from 3.5 percent to 3.37 percent July 1. Borrowers who consolidate before the end of their six-month post-graduation grace period they can get a rate as low as 2.88 percent. Borrowers with PLUS loans, which are made to parents, can lock in a rate as low as 4.25 percent.

"Clearly, while the rates are this low, it makes sense to consolidate because there are no prepayment penalties," James Flore, president of Collegiate Funding, said.

That and possible federal legislation to give consolidation loans variable interest rates are heating up the competition. "It does sound like a carnival, 'Come one, come all, you better do it now before it's too late,"' Flore said.

It's similar to the competition for personal finance loans, including home mortgages, Mark Brenner, executive vice president of College Loan Corp., said. Student loans, while they don't make as much money as other types of lending, have little risk because of their federal backing, he said.

All of the benefits of consolidation -- no origination fee, no credit check, no prepayment penalties and the fixed interest rates -- are all federally guaranteed, which means lenders must compete on the basis of additional benefits they can offer borrowers.

Most companies offer a quarter-percent deduction for signing up for automatic payments and another 1 percent deduction for making on time payments, loan experts said.

But some students may not have the option of shopping around. If all of a borrower's loans are through one lender, that lender has the first option to consolidate the loans. Only if that lender declines can students go elsewhere.

Most student borrowers, however, do have more than one lender or, like graduates of UNLV, received their federal loans directly from the U.S. Education Department and thus have the option of consolidating through the department or through any private lender.

UNLV grads can now also consolidate through their Alumni Association, which has just signed an agreement to offer them a special loan consolidation offer through Affinity Partner Relations.

Whatever company students choose, or whether they choose to consolidate at all, they should "do their homework," Judy Belanger, executive director of student enrollment and financial services at UNLV, said.

"It's important for them to review the positive aspects and not-so-positive aspects," Belanger said.