The Art of Managing PRIVATE Student Loan Debt AMSA Loan

The Art of Managing PRIVATE Student Loan Debt AMSA Loan Consolidation Private Loan – Mini Primer What Do You Do With Your Private Student Loans? The Art of Managing PRIVATE Student Loan Debt Private student loans also known as “Alternative” loans are the fastest-growing sector of the multibilliondollar student loan industry. According to a report issued by the College Board, in 2005-06, college students borrowed a record $17.3 billion in private loans, up 913 percent from a decade earlier. The growth of private loans coupled with increasing consumer credit debt on top of maximum federal student loan debt could prove disastrous for physicians-in-training who don't understand how to best manage the situation. Private student loans cannot be consolidated together with federal student loans. Private student loans and federal student loans represent entirely different lending programs and systems. Nearly 90 percent of the 2006 allopathic medical school graduates incurred education debt. Nearly 72 percent of those graduates finished medical school with debt of $100,000 or higher, over 41percent with $150,000 or higher and over 14 percent with debt of $200,000 or higher. Medical school graduates are being faced with considerable rising variable interest rate private student loans and with median educational debt being over three times the mean PGY 1 house staff stipend, today’s graduates must know how they can best lower the expense and/or more effectively manage the repayment on these loans. What do you do with your private student loans? The question, on the surface, seems quite simple and straightforward but actually represents broader and more involved issues concerning payment/management of all debt, income and individual and family personal and professional responsibilities, ambitions and goals. As noted above, private student loans cannot be included in a federal student loan consolidation. Those companies that advertise as doing so are using marketing license in that they will consolidate private and federal loans separately but allow you to make a single combined payment. Most likely there is another origination fee attached to the private loan (this is generally the second origination the borrower will pay thus making the consolidated loan even more expensive) and the private loan rate will remain variable and most often without a rate cap. It is also most likely that the term of the loan (number of years to repay) will be no longer or not much longer than the original loan. In addition, any borrower discount benefits for the federal loan may also be limited if non-existent; again making the loan and your education more expensive. More on this later. Common Mistakes When considering the management of repayment of private or any student loan, two of the biggest mistakes borrowers make are: 1. Borrowing too much to begin with – borrowing to support a lifestyle and not just the basics for 1 1 The Art of Managing PRIVATE Student Loan Debt The Art of Managing PRIVATE Student Loan Debt living and pure education expenses. 2. Dealing with the repayment of student loans outside of the context of all debt and income. Let me explain – No. 1. The more one borrows the more you have to repay. Too often students look back on their spending during their student years and cannot identify where all the money went. When using borrowed money to pay an extra $200 per month for the apartment with the pool and fitness facility (although the school has both) over the course of two years the $4800 in rent paid from funds borrowed from a 15-year private student loan at 7.0 percent interest will require the graduate to earn an additional $11,000+ in income to cover the real expense of the apartment. It also means that the borrower has forgone nearly $18,000 that would be available if the payments for this additional portion of the loan were put into a stock indexed mutual fund averaging 10.0 percent. AMSA Loan Consolidation Program Private Loan Consolidation Rationale The AMSA Loan Consolidation Program until recently did not have a consolidation program for private student loans because we did not find any lenders that could provide terms what would be best or even a significant improvement over the original private loan: low fixed rates, no additional origination fees and no prepayment penalties being the basic requirements. In addition, many if not most private student loans have repayment terms between 15 and 25 years, thus the ability to lower payments by extending the repayment term is very limited and unlikely. It has been the considered opinion of the AMSA Loan Consolidation Program that the cost of an additional origination fee, rising variable interest rates coupled with terms that are not in the financial best interest of borrowers is a highly flawed financial choice. Borrowers most likely paid fees when they initially took out their private loans. With private loan consolidation most companies will assess more fees to consolidate the loans (1 percent - 5 percent is common with fees rising that approach 10 percent). These fees along with maintaining a variable rate loan are the biggest reasons why borrowers may often be better off not consolidating private loans. Unfortunately, the phenomenal increase in consumer and educational debt lead by the exponentially increase in the use of private student loans over the last decade ending in 2005-2006 has lead the AMSA Loan Consolidation Program to recognize and acknowledge that the growth of private loans coupled with consumer credit debt on top of sizable federal student loan debt could prove disastrous for a number of medical school graduates. As such, the AMSA Loan Consolidation Program remains committed to not recommending consolidation of private student loans, however, it does recognize and acknowledge that unique individual financial circumstances may find it necessary to reduce monthly payments and improve personal financial conditions by consolidating private loans. This is a strategic financial tactic which must be approached with great care and understanding. When Considering Private Loan Repayment Strategies When considering strategies to lower the cost of repaying private loans it first must be explicitly understood that every borrower is unique in terms of their debt portfolio, money management skills and knowledge, consumer behavior (spenders or savers), understanding and tolerance of debt, income, liabilities, wealth and personal and professional goals and ambitions. With this understanding and caveats as noted above it is the recommendation of the AMSA Loan Consolidation Program that in this current student loan environment, borrowers should: • first consolidate eligible federal loans and lock in current low rates which are relative bargains provided that there are no opportunities for any type of loan forgiveness, cancellation or service payback. • keep in mind that the best option/choice for private student loans is often to leave them alone. 2 2 The Art of Managing PRIVATE Student Loan Debt • understand that if you must consolidate your private loans start with and research your current lender(s). There are very few companies that will consolidate private loans. • understand that many companies will offer some type of consolidation or “refinancing” of private loans, but will require that you have loans with them to be eligible. This requirement will differ by lender; some will require at least one loan be with them, some may require that at least 50 percent of the consolidated amount be with them. • review the benefits of your current private loan lender to determine if the lender offers options to postpone and/or significantly lower your payments by 15 percent to 30 percent or more by reducing your rate an/or extending the amount of time you have to pay without additional fees. • remember that private loan consolidation is a credit based program and that the terms and rates of your private consolidation loans are dependent upon your credit worthiness as determined by the lender. • know that your interest rate with excellent credit should never be worse than the prime rate (currently 8.25 percent - May 2007), but could be the prime rate plus 6 percentage points or more than that with poor credit. • educate yourself and shop around for the private student loan consolidation program best suited for your individual needs. • remember to read and understand the “fine print” and be certain that there are no penalties for prepayment. • assess customer service as you shop, there is no substitute for doing business with knowledgeable, experienced, professional, live, easy to access customer service representatives. The AMSA Loan Consolidation Program – Private Loan Consolidation Option As a result of this changing education debt environment, the AMSA Loan Consolidation Program has added a Private Loan Consolidation Option. Although not meeting all of the criteria we have articulated for the perfect private loan consolidation program, the USEFC Private Loan Consolidation Program provides a number of unique benefits which may be very helpful for those graduates who absolutely must turn to private loan consolidation. Highlights of the USEFG Private Consolidation Loan for the AMSA Loan Consolidation Program are as follows: • Credit based, not a “debt to income” loan. • Annual income and employment are not considered. • Minimum borrowing - $10,000. • Maximum borrowing - $150,000. • If the qualified borrower chooses to use a cosigner, the interest rate could be lowered 0.25% to 0.75%. • Variable interest rate, adjusted quarterly - based upon the 3 month London Interbank Offered Rate (LIBOR) rate plus a range from 2.5% to 9.95% based upon the higher education attainment level of the borrower. • The attained interest rate remains fixed (capped) for the life of the loan. ∗ The higher the higher education attainment level the lower the interest rate margin. • An origination fee is added to the principal balance and it is not necessary to pay up front. 3 The Art of Managing PRIVATE Student Loan Debt • The origination fee is based on the borrower’s credit worthiness and highest educational level achieved. • • Bachelors Degree - 0.5% to 5%. Masters or higher - 0.5% to 5%. • Borrower Benefits • 0.25% provided for ACH. • Forbearance granted for: • In-School half-time or more • Medical Residency • Graduate Fellowship • Deployed Military • No Prepayment Penalty – any payment received in excess of required monthly payment, the extra will automatically be applied to principal. • Repayment term is 30 years, regardless of loan balance. For complete details and more information please contact one of our professional experienced Consolidation Counselors for the AMSA Loan Consolidation Program by calling toll-free 1-800-741-4704 Be sure to reference AMSA. Monday – Friday 9:00 AM – 11:00 PM (ET) Saturday 9:00 AM – 5:00 PM (ET) Preparing Your Money & Student Loans for Residency and Beyond: • What is your annual salary? • How much are you spending or plan to spend? • How much for an apartment/mortgage, utilities, relocation, entertainment, wardrobe, transportation, savings/investments, retirement, insurance and loan and credit card repayments? You have just outlined a basic budget! • Did you end up with income left over or more expenses than income? • Did you include loan repayment? • Did you have enough discretionary income (money not obligated to pay a specific expense) to meet 4 The Art of Managing PRIVATE Student Loan Debt The Art of Managing PRIVATE Student Loan Debt a significant increase for a variable rate payment? • Did you do as most, and forget to deduct FICA, health insurance, taxes, 401 (k) and charitable contributions when calculating your spending? • Go back through the math and see how it stacks up when you deduct your payments from your "take home" income. If you have more expenses than income you will have to make some adjustments and take two of the leading tips of millionaires: 1. Save/invest 15 – 20 percent of your household income; and 2. Live below your means. With American's personal savings rate below zero (- 0.5 percent), most recent graduates will find it difficult to immediately start to save 15 – 20 percent. The key is to start with something, $5.00 or even $10.00 a week and work your up develops the "paying yourself" savings habit. Save tax refunds, bonuses, gifts and pay raises. Living Abundantly Another key lesson learned from millionaires is that individuals/families must commit themselves to their mutually agreed upon future and live below their means so that they are able to pay their loans/debts, acquire funds/assets and build wealth successfully over time. Saving and investing over time allows money to work and make money for you, building wealth and economic stability and security. Living below your means should mean “living abundantly.” Marilyn vos Savant who is listed in the Guinness Book of World Records Hall of Fame for the “Highest IQ.” describes “living abundantly” as “having a happy marriage or long-term romance, a loving family, work that is enjoyable and productive, and not desiring any material goods that you can’t have.” She goes on to state, “Assuming you live in a country such as our own, nature and your five senses will provide great abundance. That includes making love, rearing children, enjoying food, and all that goes with a good life.” The first step in this journey of living abundantly is understanding and documenting what you have and what you need and of course what you want. This exercise provides you with the basis for your spending plan for success, budget and cash flow analysis. By preparing a careful detail budget and cash flow to understand where the money is coming from and where it is going it is suggested that you and everyone involved in earning or spending money in the household unit take at least two weeks of every year and track every penny spent. This allows us all to identify the miscellaneous creep that everyone experiences when you break a $10 or $20 bill and can never quite identify what happened to the change. This is your money and you want to identify it, control it and put it to work. After reviewing the budget and cash flow each individual or couple (everyone who make or spends money including children if part of the living/spending arrangement) should sit down, discuss and identify what the primary financial objectives and goals are (long, mid-term and short). What does everyone need and want? - a new car, a house, vacation, kids or more kids, kid's education, retirement at 50. This establishes priorities for spending, saving and investing. This also helps to focus the budget and can and should allow for some reasonable amount of "stuff" and "spare of the moment just because" things. I find that making this an all parties involved annual event scheduled around a memorable annual event like the day after New Years - January 2nd for instance makes the process almost game like. Also remember that this will not or should not be a one time or marathon activity. 5 5 The Art of Managing PRIVATE Student Loan Debt The Art of Managing PRIVATE Student Loan Debt Now with a budget in hand, remembering that a budget is a living tool for spending and saving and that it is not written in stone, it becomes a roadmap for achieving life's goals. Take a look at the budget that's been created and look for savings that your can and will happily make to increase your discretionary funds (money that is not already obligated to pay for something specific). This may take the form of fewer expenses (living below one's means, less expensive car, no car, not buying new furniture for a few years, delaying marriage or kids and possibly deferment or forbearance on low rate federal consolidation loans, etc.). This analysis may also take the form of more income (a part-time job or a better paying job) or a combination of lowering expenses and increasing income. You may also find that contributing to your employer's 401 (k) or 401 (b) plan may help you save money and at the same time leave you with more discretionary money as well. Everyone should contribute up to the maximum of the employer's match to these plans. Employers that match as little as 0.25 cents for every dollar contributed into the plan are actually providing you with an immediate 25.0 percent return! In addition since the funds you contribute are pre-tax dollars your reported taxable income is lowered thus your taxes are reduced and you may experience relative little change in take home pay. After the employer's match has been reached switching your contributions into a Roth IRA with after tax dollars has been widely suggested by professional money experts. With the Roth, any money deposited into the account after five years can be withdrawn without penalty, but any interest earned cannot. Of course as with any and all major financial decisions you should work with your team of professional financial advisors. The objective of this exercise is to find solutions, which you can live with and not have it feel arduous because just as diets fail because they tend to feel sacrificial so will a begrudged spending plan/budget. On a regular basis, preferably once a month set aside 45 minutes to an hour, (keeping it short, focused and sweet) to review and discuss your financial plan, budget and goals. Access what you are doing well and where you can improve or need help some help. Also be mindful of changes. Everyone participating in earning and/or spending household monies should participate. These newly identified savings, found money if you will, must be maximized (think super-sized) in value in relationship to your goals and attitudes, behaviors etc. It's really not just about money. As you look at the entire picture (money in, money out, wants, desires and needs) a level of clarity will evolve in terms of which debts are good debts (adds value and/or appreciates in value) and which are not good (not worth the initial cost or depreciates in value that cannot be recovered). Pay Off Debt Or Save and Invest? Although you may pay more in interest it may be worth extending some good debt (low interest rates on stable/appreciating assets – this most likely will include your education financed via federal loans or federal consolidation) in order to maximize the use of your money (earning a return from saving/ investing). When addressing debt pay off versus saving/investing you first must determine which debt is most expensive. In other words, debt that is far more valuable being paid off because the value of the item purchased is depreciating and/or the interest rate exceeds what you could earn if you saved or invested the funds. The lower the rate of interest on your loan and the higher the average market return, the more it makes sense to invest your extra dollars instead of paying down on your loan. The difference between these two rates is known as the "spread." If market rate of return is 11 percent and the interest on your student loan is 6 percent, then, the "spread" is 5 percent (11 percent minus 6 percent). It can be a savvy financial move to pay more in total interest over the long term in order to have access to more current funds to be used to save and invest over longer periods of time which allows compounding interest to work its amazing wonderful magic. 6 6 The Art of Managing PRIVATE Student Loan Debt The Art of Managing PRIVATE Student Loan Debt Side Note: How to Pay off Student Loans While Building Wealth Let's look at two examples presented by freemoneyfinance.com in an article entitled How to Pay off Student Loans While Building Wealth - http://www.freemoneyfinance.com/2007/05/ how_to_pay_off_.html: Jane and Joe each have $20,000 in student loans which are to be paid over 10 years at 4 percent interest. Joe pays his monthly payments of $202 plus $100 extra to retire his debt as quickly as possible. By paying making bigger payments, Joe is able to pay off his debt in just over 6 years. Now, with his debt out of the way, Joe invests the full $302 per month that he had been putting towards his debt. Ten years after graduating, Joe has paid off his school debt and his investments have grown to $16,728. Jane decides to adopt a different loan repayment strategy. Instead of paying extra on her loans, Jane pays only the minimum amount of $202. She takes the extra $100 per month that she could have been paying toward her debt and invests it. She continues this simple plan for the full life of her loan. Because she makes no extra payments on her loan, she takes the full 10 years to pay off her loan. Now, ten years later, Jane's loan is finally paid. However, her investments have grown to $21,700, beating Joe's return by $4,972 - nearly 30 percent. Jane has made more than Joe even though she only paid the minimum balance due on her loan. Instead of making extra payments as Joe did, she invested her money for a longer period of time. And even though Joe was able to retire his debt sooner than Jane, his big monthly investments were unable to catch up with Jane's early saving. Jane was able to boost her savings by starting early and harnessing the power of compounding interest. In the investing world, we call this principle the 'time-value' of money. However, this model is not ideal for everyone facing student loans. The smaller the spread between your loan interest rate and the average market return, the less appealing this strategy becomes. But, there is one additional reason students should consider paying just the minimum monthly payment on student loans. Student loan interest, like home mortgage interest, is tax deductible. By allowing you a tax deduction of up to $2,500 for student loan interest, Uncle Sam is, in effect, helping to subsidize the cost of your loan. The faster you pay down principle, the faster you lose your tax deduction, which is one more reason that paying just the minimum may be the best option. And, with the savings from your tax deduction, you have more money to invest at higher rates of return. In order to benefit from this loan repayment strategy, you must save and invest your money. If you don't invest the extra money, you would have been better off putting your extra dollars toward the repayment of your loan. ∗ Learn about your loans. Many student loans allow for a 6-9 month grace period before loan repayment begins. During this time, your loans may be charged a lower rate of interest. Consider consolidating your loans and locking in your interest rate while your loans are at a lower rate. This may not only help keep the cost of borrowing lower, but it will mean you only have to write one check per month. ∗ Establish an emergency fund. You should have enough money in your emergency fund to cover three months of expenses. This money should be used only in the case of emergencies, and not for those 7 7 The Art of Managing PRIVATE Student Loan Debt The Art of Managing PRIVATE Student Loan Debt late-night runs to Taco Bell. ∗ Pay off your credit card. It's estimated that college graduates carry an average of $2,500 in credit card debt. Most credit cards have very high interest costs. Be sure that you are not one of them. You cannot build wealth while paying 19 percent interest on your credit card purchases. Do not begin investing until you have an emergency fund and have eliminated your credit card debt. ∗ Sign up for free money. If you have just started a new job, check to see what type of retirement benefits your company offers. Many companies will match your contributions dollar-for-dollar up to a certain percent of your pay. In other words, you get free money if you invest in the company retirement plan. Make every effort to contribute enough to get the full match. By doing so, you are, in essence, receiving a 100 percent return on your money. And, don't assume you are too young to save for retirement. By saving now, and harnessing the power of compounding interest, you'll have enough to retire long before most of your friends. Remember the time-value of money! ∗ Contribute to a Roth IRA. Once you've built up an emergency fund, paid off your credit cards, and taken advantage of any free money available through your employer, make every effort to invest any remaining dollars in a Roth IRA. A Roth IRA is the ideal place to put those extra dollars you were otherwise going to apply to your student loan principle. Building wealth takes time. By starting early, you'll be sure to make the grade. Now with all of this said one should take some portion of the identified savings and apply it to additional principal payments on the most expensive (highest interest rate loans) - those whose interest rates exceeds your ability to earn interest and/or on depreciating assets). Now these loans that you are accelerating payment by making additional principal payments may be private student loans, credit card or other high interest debt. By addressing the most expensive loans first you are increasing the value of your money. For example, consider the best choice of paying extra on a 12 percent private student loan or a 24.99 percent credit card or a 4.75 percent consolidated student loan. The choice is obvious when you understand the concept of maximizing the use of your money. There is also an added benefit in that by accelerating debt payoff you are improving your debt-to-income ratio, which improves your credit score, which provides you with access to lower interest rates and larger loans in the future. Now other than extreme situations, practically you most likely should not take all of your identified budget savings and pay off debt, you need to have a balance which fits your life objectives and includes emergency cash, saving and investing with your discretionary money. Historic long-term index stock market returns for large cap stocks average approximately 10.0 percent. At a 10 percent rate of return, using the Rule of 72 (dividing 72 by the interest rate), your money will double your money in 7.2 years. Hence the importance of starting to save/invest early on will allow compounding to work longer in building your financial assets – and doubling your money. Side Note: Double Your Money This is such an important concept to understand, let’s use an example. Starting at the age of 23 you deposit $100 per month into an account paying 10 percent interest annually. At the age of 55, you have $215,487.17. If you wait until you are 30 years old, just seven years later, and follow the same savings plan, at the age of 55 you will have accumulated $104,285.81. Not bad, but $111,285.81 or twice as much less than what you would have if you had begun just seven years earlier. Hence the power of having access to discretionary dollars and starting a savings/investing plan early so compounding interest can demonstrate its power. 8 8 The Art of Managing PRIVATE Student Loan Debt The Art of Managing PRIVATE Student Loan Debt As noted several times before, when investing, all individuals and families should identify and work with a team of experienced trustworthy and knowledgeable financial professionals. Now in specific regards to private/alternative loans, we have found that there is "what should be done" and "what people are comfortable in during". In the case of comfortable, practical and financially sound, if the variable rate on private loans starts to approach/match other existing consumer debt such as credit cards or exceeds roughly 8.00 percent, accelerating payment, i.e. making more than the minimum payment and applying the added payment to principal tends to be practical, mentally comfortable and financially acceptable for many. However, at all times, do remember the importance of financial balance paying off debt particularly bad debt and accumulating cash and funds through savings and investments even under such circumstances. Some Things You Need To Know About Private Student Loans There are some specific things you need to know about private student loans when deciding how to manage them. • Does the private loan have a variable interest rate and how often is it reset? • What index is the variable rate based upon (LIBOR, Prime, Other)? • Does the loan rate have a cap on the interest rate? • Who is the lender? • Is there a penalty for paying the loan off early? • How much is/was the origination fee? • Will the lender allow you to extend your repayment term (number of months of repayment) without charging any fees? Knowing the index is very important because being in an increasing rate environment, when budgeting you will need to be prepared to make larger payments whenever the index for the interest rate rises. In some cases where the variable rates increases significantly, it may be necessary to use the savings identified in your budget to just make the new higher payments. LIBOR is generally a more consumer friendly rate. When considering the management of private student loan debt the very first effort should be to keep borrowing from this source to an absolute minimum. Maximize government guaranteed or low cost school loan sources first; but only borrow what you need for the basics – not lifestyle. As a student, when considering the management of repaying private student loan debt, one of your first efforts should be the selection of the best private loan source/lender from which your are eligible to borrower. This means understanding and maintaining an excellent credit history and score. Private student loan interest rates and origination fees can be substantially lower with a strong credit history and score. Alternative Loan Repayment Strategies If a borrower has a home with sufficient equity and can obtain a relative low fixed interest home equity line of credit to pay off the private student loan, this can be a consideration, which may also have some tax advantages since home loan interest may be tax deductible (consult with a tax professional). However, the borrower is now putting their home up as collateral for a student loan. Consider for example, most private student loans are not discharged in case of bankruptcy or death. Again, this is an area where professional counsel is required and your total financial situation should be reviewed and evaluated in relation to your personal and professional goals. 9 9 The Art of Managing PRIVATE Student Loan Debt The Art of Managing PRIVATE Student Loan Debt Borrowers may also want to look at loan forgiveness programs or create such a program with an employer to pay off their student loans. Although most loan forgiveness programs are federally funded, a loan forgiveness strategy may only be good for federal loans. If this is the case the borrower can direct the monies they would have paid on the federal loan to payments on their loans of highest interest. Along the same line of thought the borrower may wish to see if they are eligible to defer or receive forbearance on their federal consolidation loan. In this way the borrower may suspend or make lower interest or partial interest payments on the federal consolidation loan (with deferment the interest subsidy on the subsidized Stafford loan continues but is not in forbearance) and then apply the balance of what they would have been paying on their consolidation loan to accelerated principal payments (making paying that are more than the minimum) on the private loan. The plan here is to defer or seek forbearance or interest only payment for several years on the low interest federal consolidation loan and apply those dollars to accelerated payment on private loans or other higher interest rate loans. The borrower will then begin payment on their lower fixed interest rate federal consolidation loans in a few years based upon the expectation that they will grow and increase their income thus allowing them to manage their money and affairs, continue to make accelerated payment on high interest debt, make federal loan consolidation payments and progress toward their ambitions without diminishing the pursuit of their goals. Example of Pre-Payment on Principal Using such a strategy for example, $30,000 in private loans assuming an average interest rate of 9.0 percent with a 15-year term would average monthly payments of $304.28 beginning in 2007. This loan would be paid off in the year 2021 having paid $24,770.40 in interest. Adding an additional $100 a month to the loan payment would reduce the payoff by 6 years reducing the total interest paid by 43.5 percent or $10,776. Adding an additional $200 a month to the private loan payment would reduce the payoff by 9 years, thus paying off the $30,000 loan in 6 years with total interest paid 60.11 percent less or $14,889.78 than what would have been paid following the original schedule. Debt Management is Holistic The management of federal and private student loans must be considered and addressed within the context of all current and future debt, income, money attitudes and behavior, the understanding of money and money management, personal tolerances for risk and debt and personal and professional goals and objectives. In other words, repayment of student loans, both federal and private is part of a holistic approach to life. By first obtaining, accurate information and knowledge about money and finances and assembly of an experienced trustworthy and knowledgeable team of professional advisors whose priorities are what you want in and out of life - the process is probably easier and simpler than planning a wedding or vacation. It's really that easy. Important Points to REMEMBER: 1. The key question is whether or not private loan consolidation is in your best interest? 2. In most cases it is not – the best option/choice is often to leave them alone! 3. You cannot consolidate private loans until you’re out of school and starting repayment. 4. You cannot consolidate your federal student loans together with your private education loans. They should be consolidated separately, as the federal consolidation loans offer superior benefits and lower interest rates for consolidating federal student loans. 5. Any suggestion by a lender to consolidate private and federal student loans together should immediately eliminate that lender from your consideration. 6. Consolidating private loans will in the vast majority of cases will give you with a variable rate loan 10 10 The Art of Managing PRIVATE Student Loan Debt – Managing PRIVATE Student Loan Debt The Art of NOT a fixed interest rate. 7. If you must consolidate your private loan with a variable rate find one with the lowest rate terms with a cap on the maximum interest rate. Other Private Education Loan Lenders; The following education lenders, found on the FinAid.com website - http://finaid.org/loans/ privateconsolidation.phtml will consolidate private education loans. These are private consolidation programs, so the interest rates are dictated by the lender, not the government. There may be additional fees charged for originating these loans. Lender Collegiate Funding Services (CFS) Descriptions $7,500 minimum. $125,000 maximum. Up to 30-year term. No prepayment penalty. Variable rate loan. Best variable rate is Prime + 1percent. Guarantee fee of 1percent to 3percent (added to principal). $10,000 minimum. $250,000 maximum. 20-year term for loans less than $40,000. Up to 25-year loan term for higher amounts. Variable rate loan. Interest rates range from Prime + 0.0percent to Prime + 4percent, but may be higher based on changes in the Margin Adjustment Index. Fees of 0percent to 4percent. $7,500 minimum. Up to 30-year term. No prepayment penalty. 0.25percent interest rate reduction for making monthly payments via EFT. Choice of variable or fixed interest rate. Best variable rate is 3-month LIBOR + 1.80percent. Fixed rate is 2.01percent higher. No fees. $7,500 mimimum. $75,000 maximum for non-Key debt; no maximum for Key education debt. Choice of 10, 15 or 30 year repayment term. Variable rate loan, with rates pegged to repayment term: 3-month LIBOR + 3.75percent (10 years), 3-month LIBOR + 4.25percent (15 years), and 3month LIBOR + 5.00percent (30 years). No prepayment penalty. No fees. $5,000 minimum. $100,000 maximum for non-Nelnet debt; no maximum for Nelnet education debt. Variable interest rate. Best variable rate of Prime + 4.75percent. 0.5percent interest rate reduction after making 48 initial on-time monthly payments. Co-signer release option after 48 initial on-time monthly payments. $7,500 minimum. $125,000 maximum. Up to 30-year term. No prepayment penalties. Variable rate loan. Best rate of 3-month LIBOR + 4.45percent to 3-month LIBOR + 4.95percent. Origination fees of 0percent to 7percent. $5,000 minimum. $275,000 maximum. Up to 30-year term. No prepayment penalties. Variable rate loan. Interest rates vary from Prime + 0.0percent to Prime + 6.0percent, depending on credit history. Origination fee of 2percent to 5percent. Co-signer release after 24 on-time payments. $10,000 minimum. $250,000 maximum. 20-year term for loans less than $40,000. Up to 25-year loan term for higher amounts. Variable rate loan. Interest rates range from Prime + 0.0percent to Prime + 9.90percent, but may be higher based on changes in the Margin Adjustment Index. Origination fee of 0percent to 10percent (added to principal). $5,000 minimum. $100,000 maximum. No prepayment penalties. Variable rate loan. Interest rates range from Prime + 0.25percent to Prime + 7.0percent. No origination fees. 0.25percent interest rate reduction for making monthly payments via EFT. 0.5percent interest rate reduction after making 48 initial on-time monthly payments. Co-signer release option after 24 initial on-time monthly payments. $5,000 minimum. $100,000 maximum. Up to 15-year term. Variable rate loan. Interest ranges from Prime + 0.0percent to Prime + 6.75percent. No origination fees. Up to 0.50percent interest rate reduction for making monthly payments by EFT. 0.5percent interest rate reduction after making 48 initial on-time monthly payments. Co-signer release option after 24 initial on-time monthly payments. EduCap Inc. Loan to Learn Private Consolidation Loan Education Finance Partners Key Education Consolidation Loan Nelnet Private Consolidation Loan NextStudent Private Consolidation Loan Sallie Mae Private Consolidation Loan Student Loan Network SunTrust eCon Loan Wells Fargo Private Consolidation Loan 11 11 The Art of Managing PRIVATE Student Loan Debt The Art of Managing PRIVATE Student Loan Debt Final Note As a final note, do remember that a vital key to managing debt when substantial portions of it are educational debt is that you begin with the consolidation of your federal loans. If you consolidated in the past several years than congratulations you have locked in some of the lowest fixed interest rates in history - and these should be among the last loans you pay off. Should you have any questions regarding student loan consolidation you should seek expert assistance to confirm and verify any questions you may have - do not make assumptions! Just as it is important to work with professional financial advisors when making decisions about the allocation of your money, it is always wisest to work with experienced, knowledgeable and trustworthy consolidation specialist who understand and place your financial well being as the first priority. As the AMSA Loan Consolidation Program your education financial health is our first priority. As such, we work to help to assure that you are working with accurate and complete information, which will aid you in making informed decisions. Given the importance and potential savings involved, the AMSA Loan Consolidation Program in collaboration with EAS Group, LLC and ASLCC/USEFG provides consolidation counselors to work with AMSA members to assure that accurate and honest information is available to you in a non-pressured environment so that you can make informed choices which will have direct significance on your finances for the rest of your life. Consolidation Counselors for the AMSA Loan Consolidation Program (federal and private loans) can be reached by calling toll-free 1-800-741-4704 Be sure to reference AMSA. Monday – Friday 9:00 AM – 11:00 PM (ET) Saturday 9:00 AM – 5:00 PM (ET) These exceptionally knowledgeable and experienced professionals have assisted many of your colleagues in their consolidation efforts. In addition, they are also very nice people. Be sure to reference AMSA when you call. Take a moment to call and speak with or schedule a time to speak with a counselor for details regarding your federal and if necessary, private student loan consolidation. Should you have additional questions regarding private student loans, please do not hesitate to contact me at info@amsaloanconsolidation.com. Understanding debt and money management may save and earn you a small fortune and be one of the smartest decisions you will ever make! Leon Johnson, Jr., M.B.A., D.Ed. President & CEO EAS Group, LLC - Program Administrators of the AMSA Loan Consolidation Program May 2007 12 12