Your Questions About Direct Loans

Nagesh answers:

Direct Loans is who now handles all new Federal Stafford Loans, which are sometimes referred to as FAFSA loans. FAFSA is an application for multiple types of aid, including Pell Grant, Stafford Loans, and sometimes state or institutional aid.

Nagesh answers:

If you have a Direct Stafford Loan, the federal government through the U.S. Department of Education is your lender.

Under the Direct Loan Program, the funds for your loan come directly from the federal government.

Http://studentaid.ed.gov/PORTALSWebApp/students/english/studentloans.jsp?tab=funding

Nagesh answers:

Direct Stafford loans generally have to be paid out in two disbursements, usually for the fall and spring semesters. However, not all colleges use a two semester system, and some do more than two disbursements. So, you really have to ask your college what policies apply in your particular case.

The financial aid staff at your college is there to help you. You are entitled to receive full information about your loans and a clear explanation of the school’s policies. If the person you are assigned to is rude or not answering your questions, ask to speak with her supervisor. If you still are not able to obtain the information you want, contact the Direct Loan Servicing Center. You can find contact information at www.studentloans.gov.

Nagesh answers:

Hello,

Direct Subsidized Loan – those interests you do not have to pay if you are in school full-time/part-time. If you finish school or just as you say no longer “at least half time,” then the interest would be: 0.225 a day until you repay the whole amount of the loan.

How I came up with t0.225: $1750 * 4.5 divided by 100, then divided by 350.

Nagesh answers:

The mailings you’ve been getting are about “loan consolidation.” It basically goes like this:

The rates on your current Stafford Loans are inherently *variable* — that is, they are “reset” (i.e. They are changed) once a year (on July 1st) by the US federal government. This past year, the rates were 4.7% for students in school (or in deferment, or in their grace period) and 5.3% for students in repayment. Starting TOMORROW July 1st, the rates are going to increase by 1.84%.

All borrowers will be automatically subject to these rate increases. The only way to NOT be affected by them is to apply for Federal Consolidation Loan. In effect, when you consolidate, your lender will take your variable rate loans and combine them into one big *fixed*-rate rate loan. It’s still a federal program and the rates are still set by the federal government, but the primary difference is the fixed rate.

As with any financial decision, there are pros and cons to loan consolidation. In general, consolidation is a good thing: not only does it offer fixed rates, but it also allows borrowers to extend their repayment term beyond the standard 10-year repayment term that most students loans (Stafford and Perkins) carry.

Keep in mind that, once you have consolidated, you won’t be able to UNconsolidate. So, yes, you would be out of luck if the rates decreased dramatically. While it is *possible* that rates will go down sometime during the 10+ years that you are in repayment, it is more likely that the next few years of your repayment period will be spent watching variable rates increase. While no one can predict the future, it is very unlikely that Stafford/PLUS loan interest rates will ever reach the historic lows that they dropped to a few years ago.

One “con” of consolidation: You will generally lose your grace period if you choose to consolidate. You do need to think long and hard about whether this is a loss that you are willing to endure. Financially speaking, you’re looking at the difference between (a) being able to lock in a 4.75% interest rate on your Staffords or (b) watching the rates rise to 6.54%, then 7.14%, then whatever the government decides to set them at for 2007-08). If you can handle losing your grace period, it’s worth it to lock in that 4.75% (you might even be able to get a bit of an interest rate “break” depending on who you consolidate with).

NOW, although I almost always recommend consolidating Stafford Loans, your Perkins Loans are a separate issue. Perkins loans are FIXED-rate loans (they’ve been at 5% for *years* and there is no indication that this will change).

Perkins carry additional “benefits” with them that might be lost in a consolidation situation. For example, Perkins Loans can be cancelled in full if you enter one of several career fields (law enforcement, teaching, etc.). The interest on [unconsolidated] Perkins Loans is subsidized during any in-school/grace/deferment periods, so if you went back to school or applied for a economic hardship deferment later on, your interest would temporarily stop accuring. If you consolidate the loan, these cancellation benefits and interest subsidies would no longer exist.

Moreover, if you consolidate your Stafford loans *together* with your Perkins loans, the lender will calculate your interest rate by taking a “weighted average” of your loans’ current rates, so your rate could be anywhere between 4.7% and 5%.

It’s up to you if you want to consolidate Perkins. Perkins loans by themselves carry a “minimum” payment that you must pay. Naturally, if you consolidate it, the minimum doesn’t apply, so usually by consolidating Perkins, you will be able to lower your overall monthly payment on the Consolidation Loan. So, if you want to leave Perkins out of the mix, be sure to ask yourself if you think you can handle the larger monthly payment.

Generally, when students ask me whether they should consolidate Perkins, I ask them
(a) how much debt do you have? A ton? Is there a chance that your monthly payment will be more than you can handle? Consolidating everything might be the only way to get your monthly payment down to a reasonable amount
(b) do you qualify for loan cancellation? Check here: http://www.finaid.org/loans/forgiveness.phtml . If you do, don’t consolidate your Perkins
(c) are you planning on returning to school anytime soon? If so, you might want to leave out your Perkins so that it will be subsidized while you are in school.

SO, should you trust these mailings that you’ve been getting? Well, most of the DATA is trustworthy, but some of the companies won’t be. Speaking very generally, any company that has to send you unsolicited mail to get your business is probably less-than-reliable… Desperate, even. Do yourself a huge favor and don’t apply with companies like NSL Direct. Go for a well-established company like Sallie Mae or Citibank. Or, since you already have direct loans, you might want to consolidate your loans through the Direct Lending Program (which is a federal program as well). Their website can be found here: http://www.dl.ed.gov/consolidatenow/welcome.asp If you don’t consider yourself

One more thing: you have to submit your application TODAY, June 30th, before the rates change. If you don’t, there isn’t much that anyone can do to help you lock in a rate that’s no longer being offered.