Thursday, December 21, 2006

Private Student Loan Consolidation

Last week I wrote about federal loan consolidation and emphasized the importance of reviewing offers closely. There are two changes I wanted to point out: (1) Educational Loan Company - mentioned as a good baseline for comparing “medium-term” repayment offers – had required a minimum consolidation amount of $20,000; that has been reduced to $10,000. (2) The North Carolina Program, which had offered a 2% rate reduction incentive, offers incentives totaling 2% for on-time payment and an additional .25% reduction for auto payment (2.25% total rate reduction benefit available).

Contrary to popular belief, private loans can be consolidated … Here is what you should know if you have them and are considering consolidation:

• DO NOT consolidate them with federal loans even if they provide the option.

• They can’t be consolidated until you’re out of school and beginning repayment.

• In most cases, consolidating private loans will leave you with a variable rate loan – it will not typically fix your loan rate [like federal consolidation].

• Keep in mind that the best option is often to leave them alone. How to know?

1) Look at the benefits of your current lender. There are only about ten lenders that will consolidate any private loans. Most companies require that you have loans with them to be eligible to consolidate with them. The amount will vary – some will require that you have one or more loans with them – some will require 50% or more of the consolidating amount be with that lender. Researching your lender is a good start …

2) Shop around. As mentioned, there are a few companies that don’t have stipulations in order to use their consolidation/refinance program. Here’s a published list - The lender, not the government, dictates the interest rates provided [most are linked to the Prime Rate or LIBOR].

Private loan are credit-based loans [as is the refinancing/consolidation process]. If you had poor credit when getting the loan initially, consolidating them may make sense if you now have better credit and/or a co-signer with good credit. The difference in rate from poor to excellent credit can be as much as 6%+ with some lenders. If you had good credit from the beginning, consolidation is not likely to provide much benefit to you. There are distinct costs to weigh in the decision. All of the criteria used to assess the ‘utility’ of the original loans should be examined when evaluating consolidation options. See my alternative loan article on the OFS website - - for more detailed information about ‘cost’ considerations such as fees, potential prepayment penalties, borrower benefits, etc.

Thursday, December 14, 2006

Federal Student Loan Consolidation

As the end of the semester is upon us, it seems timely to review the issue of student loan consolidation. This week I’ll address consolidation of federal loans and will address consolidation of private loans next week.

First off, some reminders about some of the recent law changes:
- In-school consolidation is no longer an option. You will need to be out of school in order to be eligible to consolidate.

- You are no longer required to have multiple lenders in order to be able to choose your lender – even if all of your loans are with one lender [i.e., DMU], you are able to shop for the best deal for you.

- You are now unable to consolidate your loans with your spouses’ loans – this was never smart, but is no longer an option.

Other important consolidation considerations:
- You do not want to consolidate Perkins loans [or other loans] if they may be forgiven or repaid by your employer, state, etc. It is ok to consolidate them otherwise.

- If a lender is offering to combine your federal loans with private loans, credit cards, or any other non-federal loan debt, RUN!

- You can AND SHOULD consolidate even if you consolidated prior to take advantage of lower rates. You can always reconsolidate (to combine) loans as long as you have loans to consolidate that haven’t been consolidated prior. As most of you heard last year from me, doing this WILL NOT negatively impact your interest rate. Your overall rate will be a weighted average of your loans rounded up to the nearest 1/8th. For example, if you consolidated $5,000 of loans at 6.8% and $5,000 at 4.8%, you would now have a $10,000 consolidation loan at 5.8% … view resources below to access a calculator to find out your weighted average.

- Some people are afraid to consolidate because their repayment will be extended (thus more interest paid). Keep in mind that you can select the repayment option you want as well as choose to pay whatever amount you want (no legitimate program will assess a penalty for early payoff). Consolidation, however, is the only way to ‘lock’ the rate of otherwise variable rate loans.

“How do I decide where to consolidate – I get so many offers?”
This is perhaps the most important question to address … My experience with consolidation issues over the past several years has drawn me to one primary conclusion – the ‘financially smart’ place to consolidate is not going to be the same for every student; it is largely a factor of how you plan to repay your debt.

(1) If you haven’t borrowed much or plan to repay your debt quickly, you should search for a company that will reward you for doing so. This benefit will normally come as a principal balance credit. For example, Key Bank offers a 5% credit for consolidating with them. Some companies will provide a max credit, as well as other ‘fine print’ caveats, so read the application. While a couple ‘Benjamins’ is nice if this is my situation, if I have a long-term repayment scenario, being enticed by this type of benefit would be a big mistake!

(2) If I find myself in a ‘long-term’ repayment situation (I’m going to define this as 10 years or more of repayment anticipated), the best “deal” for me would be the company that will reduce my interest rate the most. This won’t solely be people that have large debt levels; these will also be individuals that wisely consolidated during the past couple years when rates were at historic lows and they see an opportunity to repay their debt at amazingly low levels and want to minimize that payment while they invest, prepare for homeownership, and focus on other financial goals. Your baseline when comparing rate benefits is to understand that an “average” company will offer a 1.25% reduction (normally .25% reduction for auto pay will be provided along with a 1% reduction in rate for on-time payments [normally of 36-48 months]). As part of the resource links below, I provide links to state programs that provide ‘above average’ benefits, like North Carolina, which offers a 2.25% total benefit for automatic and on-time payments. Information about the programs as well as other information are available below …

(3) The first two scenarios will cover most individuals, however, some individuals will have borrowed too much to pay off quickly; others may be debt averse and don’t want to extend it, so they fall somewhere in between the above two options. In this case, where you plan to repay your debt over an ‘intermediate’ term, review a company that will provide interest rate benefits (these will almost always work out better than the principal credit benefits) where the benefits are offered up front. For example, the Educational Loan Company offers a better than average rate reduction benefits (1.75%), but rather than needing 4 years of on-time payment, .5% of the benefit is up front for auto pay and 1.25% is available after only 24 months of on-time payments.

NOTE. Three things I want to emphasize. (a) These are general guidelines/rules of thumb – run the numbers to see what will make sense for YOUR LOAN SITUATION. (b) Read the applications to see if there are caveats – for example, the principal balance credit by Key Bank is foregone if you defer or forebear the loans during the first 36 months of repayment; Educational Loan Company requires you to be consolidating at least $10,000 total in debt. So read through to make sure the program fits with your situation. Don’t, however, assume that you’re not eligible either. It’s easy to say “I’m not from North Carolina, so I can’t do that” when the reality is that if you’re willing to spend 5 minutes, you can create a connection that will enable you to be eligible for their program. Thus, (c) BE SMART and take a few minutes to figure things out, it will be well worth your time!

- Calculating your loan payment
- Calculating your weighted average
- Consolidation strategies
- Repayment options
- State consolidation programs

* All of these links are available via the OFS site click on the “student issues” button

Thursday, December 7, 2006

Extended Warranties - Unwarranted?

A lot of electronics will be purchased this holiday season. For those of you that will find yourself in this situation, the inevitable question awaits … “Would you like to purchase our extended warranty?” What do you do …?

What do the experts say … Consumer groups [and common sense] will normally tell you to turn down the urge to accept the offer. A fast-growing $15 billion dollar industry has been built on the likelihood, however, that you’ll succumb to the impulse to say yes. Millions of people each year pay anywhere from 10% to 50% of a product’s original purchase price to extend a warranty. The decision to buy the extended warranty defies the recommendations of most economists, consumer advocates, and product quality experts who warn that the plans rarely benefit consumers and are almost always a waste of money.

What are they … Extended warranties were first introduced as a high-pressure sales tool by large electronics stores in the late 1980s. Now, they are a core product sold by all kinds of retailers and cover a wide range of products. The warranties are technically insurance products where the premium is paid in a lump sum at the time of purchase. Extended warranties generally lengthen the coverage provided by the manufacturer’s warranty on a product. While terms vary dramatically, the plans typically add from one to three years of protection.

How do they work … In terms of service, most warranty providers use third-party contractors to repair broken items, and consumers don’t get to choose who performs a covered repair. Many policies won’t cover accidents or normal wear and tear (the most common causes of breakdowns in common household goods). Most importantly, however, is the fact that the vast majority of extended warranties are never used.

One distinct disadvantage for consumers is its vast difference versus selecting other “insurance-type” products. When buying auto insurance, for example, it’s relatively easy to make an informed purchasing decision by comparing terms and prices among different providers. It’s not nearly as simple a process to comparison shop for an extended warranty at the checkout counter. Not all salespersons are provided a commission for selling the product but be certain that they’re trained to make sure you know about the warranty and its benefits.

By the numbers … Warranty Week, an industry publication, last year estimated that of the $15 billion in premiums charged to consumers in 2004, $7.5 billion went straight into the pockets of the stores that sell warranties. Of the remaining $7.5 billion, it was estimated that only $3 billion was paid in claims by the insurance companies that back the plans (20% payout ratio). Contrast that with the auto insurance industry that paid out $66 in claims for every $100 in premiums during the same year (Insurance Information Institute).

Bottom line … Consumer Reports almost never recommends buying an extended warranty, especially on automobiles. But even Consumer Reports makes exceptions to the rule. Last year, for the first time, they discovered that repairs on some products (namely laptop PCs, treadmills, and plasma TV sets) were common enough and expensive enough that a decently priced extended warranty would make sense. So what does that mean for you? More times than not, an extended warranty is an unnecessary, expensive option – think twice about it when making that purchase this holiday season.

(SOURCE – Washington Post, October 2006)

- Extended Warranties & Service Contracts (Univ of FL)
- Extended Warranties: Are They Worth Buying? (Univ of KY)
- Take a Hard Look at Extended Warranties (CUNA)