Redo those school loans, act quickly and save money

Staying Ahead

January 11, 1999|By Jane Bryant Quinn | Jane Bryant Quinn,Washington Post Writers Group

ARE YOU currently paying off an education loan -- either a student loan or a PLUS loan taken out by parents? Time is running out, for refinancing at a lower rate. You have until Jan. 31 to apply.

At least two major lenders are competing for your business -- the federal government, through its loan-consolidation plan, and the private lender, Sallie Mae.

Normally, you consolidate to get a single monthly payment for your various loans. Also, you can lower your payments by stretching out the due date of the loan.

Today, there's a bonus. By consolidating your loans, you can also get a lower rate of interest.

Which lender you choose depends on what you want. The government starts you out with a lower monthly payment -- ideal for borrowers who feel squeezed. But Sallie Mae might cost you less in the long run.

Here's how the programs work:

The feds. The government will consolidate one or more student loans, of any amount. It will also consolidate PLUS loans for parents.

Under previous consolidation plans, the interest rate formula generally left you with a loan at 8.25 percent. Until Jan. 31, however, you can consolidate at just 7.46 percent -- a bargain for almost everyone carrying student loans today.

Repayment terms range from 10 to 30 years.

The new, low rate is variable. Every July 1, your interest rate -- hence your monthly payment -- will rise or fall, depending on the level of Treasury bill rates (you're charged 2.3 percentage points over the rate on three-month Treasuries).

Why the cutoff on Jan. 31? Ask Congress. It set the limited time period. Starting Feb. 1, consolidation loans will carry a fixed-rate formula -- putting you back to 8.25 percent.

For information and an application, call 800-557-7392 or apply via the Web at www.ed.gov/directloan. Your application must be in by Jan. 31, says Deputy Secretary Marshall Smith of the U.S. Department of Education.

The government is currently getting 10 thousand calls a week. Processing the loan takes 30 to 60 days.

By the way, only the government will consolidate defaulted loans on which no payments are currently being made -- provided you don't have a judgment against you.

Sallie Mae. This private lender consolidates two or more loans worth at least $7,500. Its interest-rate formula currently gives you a fixed rate of 8.25 percent.

But until Jan. 31, it's offering two special discounts.

You get 0.25 percent off the interest rate, for arranging automatic payments directly from your bank account. There's another 1 percent discount for making the first 48 payments on time.

The latter discount lasts for the remainder of the loan -- taking your potential rate down to a fixed 7 percent.

You do not receive this discount in the form of a lower monthly payment. Your payments will still be figured at the 8.25 percent rate.

Instead, the discount comes in the form of a shorter loan term. For information, call 800-524-9100 or check www.salliemae.com.

To compare the two programs, look what happens to the PLUS loans taken by Stephen Richardson, 51, of Oak Hill, W. Va., on behalf of his two sons.

Richardson started out in the coal mines, as did his grandfather and uncle (they both died "down under," he says).

He now works on the sales engineering staff of Mining Controls, which builds explosion-proof enclosures for underground coal mining.

"Jobs aren't too available in southern West Virginia," Richardson says. "There's coal mining. But I felt I needed to do whatever I could to give my sons a better life."

His PLUS loans are currently consolidated in a single, $32,000 government loan, at 8.25 percent. He's paying $283 a month, on a 20-year term.

If he reconsolidates with the government, at 7.46 percent interest, his monthly payment will drop to $257 until July 1, on the standard repayment plan.

Then he'll get a new monthly payment, which could be higher or lower. At current interest rates, he'd repay $61,682 over a 20-year term.

If he went with Sallie Mae, his payment would drop only slightly, to $272. With all the discounts, however, his total cost would come to $57,603. He'd have to pay for only 17 years, five months.

Richardson says he's sticking with the government loan. For yourself, check both options -- and check with your current lender, too. But do it fast. Jan. 31 isn't very far away.

Pub Date: 1/11/99

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