Meharry Loan Consolidation Primer

[2] you graduated or will graduate between July 1st 2005

	a. consolidated after July 1st 2005 Graduation b. not consolidated -- will graduate by June 30th 2006 c. consolidated all eligible loans with in-school consolidation d. completed in-school consolidation with additional outstanding eligible unconsolidated loans

Completed In-school Consolidation With Additional Outstanding Eligible Unconsolidated Loans

If you meet all of the following criteria:

Completed an in-school consolidation;

have eligible unconsolidated Federal student loans which will be fully disbursed before June 30th 2006; and

will graduate before June 30th 2006

then you also have demonstrated an exceptionally astute and financially savvy money saving and management move. By locking in the lowest fixed simple interest rates available (pre and/or post-July 1st 2005), you have most likely saved yourself thousands if not tens of thousands of dollars on the cost of your education depending on your loan balance. These dollars can now be put toward achieving more important and valuable personal and professional goals.

Many of you most likely locked in pre-July 1st 2005 student consolidation loan rates, the lowest in history and most of the rest locked in post-July 1st 2005 rates, some of the lowest rates in student loan consolidation history and an exceptionally good rate when compared to the current cost of borrowing.

For the 2004-2005 school year, student loan rates plummeted to historical lows. On July 1st 2005, rates increased by nearly two percentage points, the first in five years and the largest one-year rise in the 40-year history of the Federal loan program. Federal education loans such as the Federal Stafford and PLUS Loans increased as much as 70%. The July 1st 2005 rate hike increased Federal Stafford loan rates from 2.77% to 4.70% during school, grace and deferment and from 3.37% to 5.30% during repayment and forbearance periods. Considering that the Prime Rate, the interest rate charged by banks to their most creditworthy customers, usually the most prominent and stable business customers, as of January 2005 stands at 7.25%; even with the recent rate increases, Federal student loans and student loan consolidation remain an outstanding financial bargain!

Alan Greenspan, chairman of the Federal Reserve, has stated that the central bank would keep raising interest rates. As of January 2005, Mr. Greenspan has presided over thirteen interest rate increases since June 2004 and experts note that it is most likely that the central bank will continue to increase the cost of borrowing.

Under proposed law, newly issued Stafford loans would carry a fixed interest rate of 6.8% no matter whether the student is in school or out. Legislation is also before Congress that would change the current consolidation program from a fixed simple interest rate program to a more expensive variable rate or one that would give borrowers a one-time choice of consolidating their student loans using a variable rate or a fixed rate, both capped at 8.25%. The fixed rate option would charge borrowers a one-percentage point higher interest rate than those who opt for the variable rate plus an "offset charge" equal to 0.50% of the loan principal. The combination of the higher rate and the fee, is estimated to increase the cost of a $100,000 consolidation loan by nearly $25,000.

Rep. Chet Edwards a member of the U.S. House of Representatives, Appropriations and Budget committee has stated that the proposed legislation “could add $5,000 to $28,000 to the cost of college student loans.” The proposed legislation, passed through the House Budget Committee on November 3rd 2005 would mandate a new 1.0% origination fee on consolidated student loans and there would be a new 1.0% increase in the interest rate for borrowers who want to consolidate their student loans at a fixed rate. Additionally, borrowers who are still in school would no longer be able to lock into their rates with while still in -school. Finally, the bill raises fees on new student loans as well as raising the cap on the interest rates that students and parents pay. According to Dr. Charles Young, president emeritus of UCLA, the present 5.3% rate for consolidating federally insured student loans would increase to 7.18%; a 35% increase in the loan rate. For a $40,000 loan over 25 years, the student tax would add $13,932 to total loan repayments. Proposed legislation if enacted is anticipated to become effective 2006. Borrowers who have already consolidated their loans will be grand fathered in.

Proposed legislation also includes provisions that would fix the interest rate to loans made to parents (PLUS) to 8.5% and loan origination fees that can be as high as 4.0% of the loan amount under current law gradually would be reduce and eliminated by 2011. Proposed legislation would also create new grants for needy borrowers, give breaks to military personnel with outstanding loans and raise loan limits, but the bulk of the changes would cost students more money in the long run.

Additional To Know and To Do List:

In this particular scenario, you have both consolidated and eligible unconsolidated student loans and will graduate prior to July 1st 2006 when anticipated rate and legislative changes most likely will take effect. You should check with your consolidation lender/servicer and verify and confirm your in-school status, eligible grace period and interest rate for your already consolidated loans. Providing the proper sequence of steps was taken for in-school consolidation (1st. In-School Consolidation Request for Early Repayment waving the grace period on Stafford student loans; and 2nd. Placing the Stafford loans into an in-school deferment status prior to the processing of the Consolidation Loan) your loans should be in an in-school status.

Do remember that FFELP lenders are not required to grant a borrower’s request to enter repayment status early.

Some lenders have been reported denying “in-school” consolidation prior to the March 31st 2006 expiration of the authority to do so. If this is your case, it is recommended that you use the “Super Two-Step” strategy and first consolidate with the Federal Direct Consolidation Program and then reconsolidate with Meharry or the lender of your choice.

FFELP in-school consolidations forfeit the six-month grace period for repayment following graduation. However, the low fixed interest rate and consolidation deferment and forbearance options remain available.

You should gather all of your paper work for your consolidated and unconsolidated loans; Promissory Notes, Disclosure Statements, etc. and organize this information in a secure and readily accessible file.

Next determine the total amount, interest rate, interest category (variable, fixed, subsidized, unsubsidized), forgiveness or cancellation options, repayment terms (amount, number of months/years you have to repay), selected or available repayment plan (level, graduated, interest only, income contingent repayment plan or income sensitive) and the estimated monthly payment (average Stafford loan repayment rate since July 1st 2000 is 5.05% - maximum rate is 8.25%) for all of your loans, consolidated and unconsolidated.

Once you have gathered this information for all of your eligible unconsolidated loans you will want to add them up and using a Consolidation Calculator to determine the consolidation fixed interest rate, eligible repayment period (maximum number of months/years you can take to repay the loan) and the monthly payment.

Given the state of higher education financing with potential rate increases and legislative changes that may substantially increase the cost of your education you are now faced with the decision of what to do next. Having consolidated some of your loans and having loans for which you will want to consolidate before July 1st 2006 you will now most likely be faced with deciding between two primary options:

Option No. 1 – Combine or add (if within the 180-day period) your in-school consolidation loans with your unconsolidated loans to create a new “blended” single consolidation.

Option No. 2 – Keep your in-school consolidation loan in tack and consolidate your current unconsolidated loans into a new “second” consolidation. This option will leave you with two consolidations.

With this second option note that as with the Meharry Loan Consolidation Program consolidation programs/lenders/servicers should allow you to make a single combined single check/payment on separate consolidation accounts.

The Meharry Loan Consolidation Program has prepared a review of these options, One Consolidation, Two Consolidations, Three Consolidations, More. This review also serves as a guide, which provides comparison examples, analyses, explanations of and tips on important economic and money management concepts, tools and habits that are important to know and understand for you to make an informed decision. Whether you choose to use Option 1 or Option 2 it would be difficult to go wrong. What is key is that you understand consolidation and make an informed decision about taking advantage of it because this may be your last opportunity to lock in such borrower favorable terms. After June 30th 2006 this magnificent opportunity to consolidate at fixed low interest rates and do in-school consolidation may no longer exist.

There are few if any and virtually no financially valid reason not to consolidate. The Meharry Loan Consolidation Program recommends that unless you and/or your loans meet the criteria for loan cancellation, discharge, forgiveness or repayment you should consolidate your student loans immediately.