Managing Your Student Loan Debt - Page 2 of 4

Managing Your Student Loan Debt

for about $280 of her monthly bill and have a fixed interest rate of 7.375% over a 20-year term. A private CitiAssist Loan with a variable interest rate makes up the remaining total. Today, White’s post-graduate balance is down to $46,500 and she doesn’t view her student loan debt in a negative light. “It’s just a part of me getting from point A to point B,” she says. “I’ve been able to manage it and it’s not deterring me from pursuing the lifestyle that I want.”

Consolidation—taking out a new loan to pay off old ones—can be a good option for anyone looking to reduce large student loan bills. Those with at least $7,500 in federal loans are eligible to consolidate, and recent graduates should seriously consider the option. It’s important to consider the long-term impact of student loans on your ability to establish an upscale lifestyle, buy a brand new car, or purchase a home. Financial planners advise that those considering large purchases such as buying a home get a grip on their debt first.

White’s advisor, Atlanta-based financial planner Sterling Laylock, says loan consolidation helped improve her credit profile as she and husband, Garrick, 31, shopped for the home they purchased in September 2000. “Consolidation can help people with their debt-to-income ratio if they need to go under the scrutiny of any kind of lending institution,” he says. “If their student loan payments are too high, it can exclude them from purchasing a home.” In most cases, mortgage lenders are still apt to turn you down if the amount of your total annual debt is 38% above your annual income, although some programs may allow a higher debt-to-income ratio.

When you consolidate your loans, you convert them from a variable- rate to a fixed-rate loan. That’s why it’s so attractive right now. Interest rates are low and you can lock in these rates over the life of the loan. Federal law mandates that your new loan feature the combined balance of the previous loans, as well as a weighted average of the interest rates of all your loans adjusted up to the nearest one-eighth percent. The rate cannot exceed 8.25%.

If you’re holding Federal Stafford Loans, now is a great time to consider consolidation. For students in repayment status, interest rates for Stafford Loans issued on or after July 1, 1998, are at 4.06%, down from 5.99%, and for those issued prior to July 1, 1998, the rates have also dropped significantly ranging from 4.26% to 4.86%. “This is the first time that these rates have dropped below the fixed interest rate of 5% on Perkins Loans, which institutions give to the neediest students,” says Martha Holler, a spokesperson for Sallie Mae in Reston, Virginia, one of the nation’s largest student loan lenders. The new rates will be in effect until June 30, 2003, as the government resets them every July 1.

For those who have not consolidated, the good news is