Federal Student Loan Consolidation: The Other ReFi BoomWritten by Elizabeth Belli
You've heard about refinancing in mortgage market. Who hasn't? Interest rates are at all-time lows. Folks have refinanced two and three times in as many years to save thousands of dollars in interest they would have otherwise paid. There's a similar lesser-known boom happening in world of federal student loans. Refinancing or consolidating them can also help borrowers save thousands of dollars in interest expense, and consolidation can cut a borrower's monthly payments down to a size that's much more affordable. The two most common types of federal student loans available today are Stafford loans (for students) and PLUS (Parent Loans for Undergraduate Students). The variable interest rates on these loans are lowest they have been in over 30 years - currently, Stafford loans carry a variable rate of 3.46% while student is in school, deferment and grace, and 4.06% in repayment. PLUS loan interest rates are currently 4.86% regardless of student's status. If those rates would hold over standard 10-year repayment term, that would be end of this story. But, they won't hold. Federal student loan interest rates reset every year on July 1; Stafford loans rates can climb as high as 8.25% and PLUS cap is 9%. The great news for borrowers is that consolidating these loans locks in a low interest rate. The formula for determining a Federal Consolidation Loan interest rate is to take weighted average of interest rates of loans borrower wishes to consolidate and round it up to nearest 1/8%. So, for example, if a borrower had only Stafford loans in repayment issued since July 1, 1998, variable interest rate on these loans is currently 4.06%, and fixed interest rate for that borrower's consolidation loan would be 4.125%. That's 4.125% for life of loan -which can be up to 30 years depending on borrower's level of indebtedness. Now, that's a deal every person with student loans should be considering right now. Because on July 1, interest rates reset. And there are other advantages to federal student loan consolidation. With extended repayment and graduated repayment options, borrowers' monthly payments can be reduced by 50% or more -especially helpful to recent graduates trying to make ends meet. And, if a borrower has multiple lenders and multiple monthly payments, consolidation lets borrower make a single and (generally) a lower payment to a single lender - simplifying bill payment and improving cash flow. Finally, federal student loan consolidation is free - there are absolutely no fees to consolidate. Although terms of a Federal Consolidation Loan are exactly same, regardless of who lends you money, a number of lenders are offering incentives to get borrowers to consolidate with them. And, these incentives can save borrower hundreds, even thousands of dollars in additional interest. Most common is a .25% interest rate discount when borrowers agree to repay their new consolidation loans electronically (direct debit). A more significant discount is offered by some lenders when borrowers make timely monthly payments on their new consolidation loans. For example, ConsolidateYourLoans.com offers a 1% interest rate reduction after borrower has made first 36 consolidation loan payments on time. Other lenders offer same discount after 48 or 60 payments, and others offer lesser discounts at other payment intervals, but idea is same. Just keep in mind, faster you get discount and larger discount is, more you can save.
| | What's Your Credit Score? (and what does it mean?)Written by Carole Talley
Anyone applying for a mortgage will probably hear term "credit score" mentioned at least once, and you'll ask "What's my credit score?" Depending on where you live, you may or may not get a straight answer. Some lenders or credit companies may tell you that they cannot legally release it to you, which is not true. The law does not prohibit release of this information. However, in most states, lenders and mortgage professionals are not required to tell you even though many times that is primary consideration being used when extending or refusing you credit.A "credit score" can carry a lot of weight. It can be used to determine size of your loan, terms on which money is lent to you (i.e. interest rate, length of time to repay, and whether or not you're offered a long-term fixed or short-term variable rate), amount of related fees, and your ability to purchase mortgage insurance. In long run, your credit score can cost you quite a bit of money. For example, inability to purchase mortgage insurance could mean that you'll have to bring a larger downpayment to closing table when purchasing a home. Or, an individual with low credit scores can expect lenders to charge him higher interest rates because lenders feel they are taking a greater risk with him. Lenders are concerned with only one question: "will you repay me as agreed or will you default?" Credit scores are considered good predictors of a consumer's ability and willingness to repay. A lower score predicts that you're more likely to default, so they charge a higher fee (interest rate) to loan you money. That higher interest rate could make a big difference in amount of money you pay out each month for housing and that translates into thousands of additional dollars paid over life of your loan. If your credit score is really low (520 or less), it can even be single determinant used to deny your loan application without considering anything else about you or your credit situation. So, as you see, your credit score can be very important. The state of California recently passed a law mandating that credit score information be given to prospective borrowers if they ask for it. Other states, as well as federal government, are considering passing similar legislation. So, if you're in California and applying for financing, ask for your credit score and an explanation of how it's being applied to your application. For rest of us, here's more information about credit scores and ways to improve yours as much as possible. A credit score (also called a FICO score) is a computer-generated numerical grade given to each consumer based on a wide range of criteria. This grade is used by lenders to predict their risk in doing business with you by analyzing your past behavior. FICO scores are generated and released through big three credit reporting bureaus. Each bureau has a name for its credit/FICO score. They are as follows: Equifax calls it a Beacon score, TransUnion calls it an Empirica score, and Experian (formerly TRW) calls it a Fair Isaac score. FICO scores can change day to day depending on what information is reported to credit bureau(s). The information used to calculate your credit score is widely varied, but each factor is given a numeric equivalent and added into equation. Some of thirty or so factors used to figure a FICO score are: time on job; how long you've lived at your current address; how many and what types of accounts you have; how high your account balances are; how much unused credit you maintain each month; age or newness of your accounts; and of course, negative factors such as too little or too much credit, too many inquiries in last 90 days, late payments, collections, consumer credit counseling, judgments, bankruptcies and foreclosures.
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