For those starting residency

[Dubin]

To all those starting residency, how are you dealing with deferment vs consolidation come July 1? My understanding is that by consolidating, we'll lose the interest subsidy on a portion of our Stafford loans. However, rates are at an all time low and look to be even better with the 91d Tbill slightly lower right now compared to last year. It's a great time to consolidate everything.

dubin

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[Seaglass]

If the rates are going to be lower your best move is to USE YOUR GRACE PERIOD and then consolidate. Your grace period can extend your deferment period by 6 months and for those in residencies greater than 3 years this is a good thing. As for the interest question - loans that had interest subsidized before still have interest subsidized after. Loans that had interest accruing have that interest capitalized at consolidation and then start accruing interest in consolidation based on that new capital amount.

C

 

[banner]

Dubin. you ask a good question that was on my mind. After doing the research, here is the answer.

Yes, Congress is changing the laws, as the government has been losing money with the current system, to not only raise the interest rate but change it from a fixed rate to a variable rate.

This process is scheduled to begin in July, however, Congress moves slowly, so you SHOULD be safe waiting through your grace period and then consolidating. That is what I am doing.

 

[zoolander]

There has been a push to re-organize student loans and the position of the Sallie Mae, Fannie Mae, Freddie Mac, etc organizations for the last 2-3 years.

It has to do with the fact that Sallie Mae, even though it's a publicly traded company, has the implied backing of the government for their loans. They use this backing to borrow money at low, low rates, and use the profits to (theorhetically) drive down costs, but also make agressive/risky investments in derivatives, highly pay their management, and pay a huge lobbying machine to keep their special position. Other banks like Citibank and B of A, and some congressmen, are investigating how to change this.

The federal government intends to spend money- or 'loose' money- on direct student loans so the questions are about what is the best way to do that- through Sallie Mae, directly, or some other competitive way.

These changes are pretty controversial so they probably won't happen soon. Once we consolidate, is there any chance of the terms changing in the future? I hope not.

There aren't specific solutions on the table yet so they probably won't change in the next 6 months, but...

Interesting testimony to congress on student loans from 2002:

http://www.cbo.gov/showdoc.cfm?index=5223&sequence=0

 

[mamadoc]

This stuff gives me a headache, or but I know I gotta start working on it. At our exit interview, we were told that the new rates for next year would be published in early June - and we could then decide whether we should consolidate BEFORE or AFTER July 1 when the new rates go into effect. If the new rate (effective 7/1/04) is the same or lower than the current rate, it would be better to put off consolidating until the end of the grace period, because your subsidies would continue that much longer.... once you consolidate, the subsidized part is gone.

Those of you who've been paying more attention to this, please tell me I've got this right!

 

[Dubin]

Between May 30 and July 1st, you'll know what the new rate is going to be come July 1. If it's higher, you can lock right away (or you can play the wait until next year game). If it's lower (which it looks like it will end up), you've got another year to play with (assuming grace and qualifying for deferrment). However, with the new legislation and the issue of losing interest payments on subsidized loans if you consolidate, the decision isn't straightforward.

I think I might just lock in right after July 1. Rates are at 40 year lows and likely will be up a year later anyway. I also don't want to deal with the headache of consolidating once residency starts.

 

[southerndoc]

Check the financial aid forum. I will post the auctioned T-bill that the rates will be based upon (and the estimated rates of the loans). This should be at the end of the month.

 

[avendesora]

I think I might just lock in right after July 1. Rates are at 40 year lows and likely will be up a year later anyway. I also don't want to deal with the headache of consolidating once residency starts.

Don't forget that for Stafford loans you have 6 months of grace (unless you've use it up somehow). During grace, you accumulate NO interest on subsidized loans, while the unsubsidized loans collect interest like they do during school. Also consider that during grace you are getting the same .6% discount that you are getting while in school. As soon as you enter repayment (at the end of grace) your interest rate immediately jumps by that 0.6%. The rate you lock in when you consolidate is the current rate, so if you wait till after your grace period expires to consolidate, you are automatically paying 0.6% more than you need to be. $150K x0.6 x 30years = $$$.

Now, from my viewpoint, it makes sense to wait till the end of your grace period to consolidate, UNLESS rates go up on July 1st, in which case it might make more sense to consolidate before July 1 and forgo that extra 5 months of grace.

 

[southerndoc]

avendesora brings some good points. However, if you qualify for an economic hardship deferral (as opposed to standard forbearance), then your interest rate will stay the same as your grace period.

The interest rates are:

91-day T-bill (1.1%) + 1.7 = 2.8% for in-school, grace, and deferral
91-day T-bill (1.1%) + 2.3 = 3.4% for forbearance and repayment status

 

[avendesora]

avendesora brings some good points. However, if you qualify for an economic hardship deferral (as opposed to standard forbearance), then your interest rate will stay the same as your grace period.

You may want to check on that -- the guy we had in for exit interviews specifically said the opposite of this if I understood him correctly. Also, from my understanding, consolidating has no effect on your ability to defer.

Everyone also please remember to check out everything you hear for yourself, and get everything in writing. "My buddy said I can do so and so" doesn't go very far when you're on the phone with them. No one is looking out for your interest, only their own profits.

 

[Dubin]

You may want to check on that -- the guy we had in for exit interviews specifically said the opposite of this if I understood him correctly. Also, from my understanding, consolidating has no effect on your ability to defer.

Consolidating and deferment are separate processes. However, your rate in school, during grace, and in deferment is exactly the same.

My basic summary of all of this (correct me if you disagree):
If rates will be higher July 1, go ahead and consolidate before your grace expires...apply for deferement later if you want

If rates will be lower, you basically should use your grace and defer until waiting to consolidate until you hit a period where rates bump up
(this all assumes no changes in legislation in the near future)

 

[Seaglass]

However, if you qualify for an economic hardship deferral (as opposed to standard forbearance), then your interest rate will stay the same as your grace period.

I was also informed by someone with many years of financial aid experience that this was the case.

C

 

[avendesora]

I'm frustrated because I can't find the right link, but look here:

http://www.salliemae.com/apply/borrowing/smart_instuctions.html

Recent Stafford borrowers can lock in rates as low as 2.875%.

That's because interest rates for Stafford loans disbursed on or after July 1, 1995, are subject to interest rate formulas that can set the in-grace rate as much as 0.6% below the rate charged during repayment. A half-point reduction in your consolidation rate can save you hundreds or thousands of dollars in interest expense. If you wait until afteryour grace period ends to apply, your loan will carry a rate of 3.50% or higher, based on current interest rates for your federal education loans.


Like I said, I couldn't find a link stating what the interest rate discount does in deferment, but this seems to imply that you have to consolidate during deferment to get the discount. This may only be for SallieMae -- Again, do your own homework.

I just would hate for anyone to miss what amounts to cutting your interest rate by 1/5th.