Case Study 1

All of the above loans can be consolidated except the SELF-Loan that is through the State of MN. This is a stand-alone loan and must be paid according to the promissory note.
Interest monthly for the first 12 months after leaving the institution and then principal and interest monthly with no grace period. This loan required a creditworthy co-signer and the interest is variable. Payment amount is based on amount borrowed to be repaid within 10 years from graduation or 15 years from first disbursement, whichever is less.

Borrower has graduated in the field of Education with a Science/Math major.

This borrower will be eligible to cancel his/her entire Federal Perkins Student Loan if he/she teaches Math and/or Science for a total of five years. This benefit is due to the shortage of teachers in these fields. I would counsel this borrower to leave the Perkins out of the consolidation because he would lose this benefit, once consolidated.

I would suggest that the borrower considers consolidation of his FFEL loans through his/her original lender (if all loans are through same lender) or another company who is reputable and easy to work with. The monthly payments if not consolidated will be approximately $430.00 per month for ten years. He/she could cut this payment by close to 50% and therefore be able to budget in order to make the payments on the SELF-loan. Keeping in mind the salaries of a teacher, we know he/she will be counting every penny to be able to have some discretionary income each month. It is common for teachers to have to work during the summer months to make ends meet. It is also generally understood that insurance is part of the benefit package, which is a very large dollar item in today's society. If the borrower were able to make larger payments down the road I would tell him/her to pay the loan off more quickly, saving money on interest charges. In this case I would also counsel the borrower to choose a "fixed" payment plan when consolidating. Teachers know how much "take home" pay they will receive each month. With a debt as large as this, a budget is absolutely necessary. It is easier to budget when the payment is static.

Case Study 2

The student, Mary, took four years to earn a juris doctor and a master's degree in public policy. She graduated in May 2001 and has begun a career in public interest law with a starting annual salary of $36,000.

Mary needed to decide by the end of her grace period in November 2001 whether to consolidate her loans in order to take advantage of their in-school interest rates. She used the program's interactive calculator to compare what her monthly and total loan payments would be if she consolidated versus if she did not consolidate and her out-of-school interest rate were 8.25 percent without repayment incentives. Mary determined that with the Direct Loan Program's Electronic Debit Account (.25%) repayment incentive, her consolidated loan would have a fixed interest rate of 5.375 percent and the monthly and total payments would compare as follows:

She decided to consolidate her loans because she needs to have her loan payments as close to or less than 10 percent of her monthly salary, or $300. Her initial monthly payment of $348 with the graduated repayment option on her consolidated loan would bring her closest to that figure. However, Mary has the benefit of her law school's Loan Repayment Assistance Program (LRAP) that will provide her with a forgivable annual loan to assist her with up to $55,500 of her debt load. Her position with a non-profit public interest organization and annual salary of less than $40,000 qualify her for assistance that will provide up to $681 per month toward her loan payments. Thus, if she makes standard monthly payments of $696, she will need to pay only $15 per month out of her own pocket while she begins her public interest law career. Although the LRAP can provide assistance for up to 10 years of student loan payments, it is unlikely that Mary will meet the income requirement for that length of time. Thus, her monthly payments on her consolidated loan will become more significant when she needs to make them completely with her own financial resources.

Case Study 3

Case Study 4

Dillon was enrolled in a five-year program to earn an engineering degree. He graduated in May of 2001 with debt from several lenders. He had expected to begin working in September with a salary of $52,000 annually, but his job offer was rescinded after the company instituted job cuts. He took a position with temporary agency earning approximately $24,000 annually while he looked for a permanent placement.

Dillon's consolidation decision was complicated by his mix of federal and alternative loans. He had to make a determination about whether to consolidate his federal and his alternative loans into one product or to have two separate consolidation loans for his federal debt and his alternative debt. But he also wanted to consider if he should delay consolidation until after he had secured a new job and had a better handle on his budget situation.

He went to the web sites of several of his lenders and used their calculators to compare what he would have to pay monthly and in total if he consolidated his federal loan debt. He noted that his out-of-school interest rate would be approximately 7% without repayment incentives.

Dillon noted that with the term extension under the income sensitive model, he would end up paying more in total than under a graduated plan with two-years of interest only payments.

He decided that he would sign-up for the Income Sensitive options provided by his lenders on his federal loans for the first year and then re-consider consolidation. Because his advisor reminded him of the excellent current interest rate environment, Dillon is planning on re-evaluating his situation before July of 2002 when rates will change.
But because of his concern about his uncertain financial situation, Dillon is not comfortable making a long-term decision on his student loans. Wary of falling behind on his payments, Dillon has also elected to enroll in the direct debit feature offered by all of his lenders to streamline his payments. In some cases, this will entitle him to receive a discount on his interest rate.

Dillon had the option to consolidate his private loans independently. The interest rate on several of the alternative loan consolidation products he researched were noted as Prime + 3%, although several had significant interest rate discounts of 2% for on-time payments. There were also fees of approximately 8% for most programs. However, because Dillon's undergraduate program had a customized deal with its lender, his interest rate was currently lower. And he could get an interest rate discount - although a much smaller ½% -- for paying on time without any additional fees. Dillon decided to place his private loans into the graduated repayment plan offered by his lenders and include these loans in his re-evaluation process next year.

Case Study 5

Fast forward to spring 2002: Sidney is about to graduate with a degree in international business. An independent student, Sidney borrowed heavily under the Stafford program to finance her four-year degree. She also has a small amount of Perkins loans. Soon after graduation, Sidney will start a good job, which pays $38,500 a year; she plans to live in a moderate-cost area but has not yet found a roommate to share living expenses. Also, during the last two years of school, she has amassed $11,000 in credit card debt, in part to pay for an overseas travel opportunity, relocation expenses, a series of expensive auto repairs., and other expenses.

Sidney has tried to manage her money wisely and knows she needs to keep her belt tightened during the next few years. She wants to pay down her credit card debt. She's trying to be more conscientious in making her monthly debt payments. She has paid several hefty late fees because she didn't make her credit card payments on time. . She also wants to enroll in an MBA program in several years' time.

Option 1
If Sidney consolidates only her Stafford loans, she can drop her monthly Stafford payment by $168 to $208, the amount needed to repay her loan under a level repayment option over 25 years. Because Sidney is consolidating all of her Stafford loans, she will qualify for the extended repayment option, which offers a 25-year term. Also, by consolidating in grace, she can lock in a rate of 5.5 percent. If she doesn't consolidate, her repayment rate for the Stafford loans initially will be 5.99 percent (assuming no change in current rates). Sidney can apply the extra $168 in discretionary income against her credit card payment, allowing her to payback the debt within 4 years. Because she plans to go back to school, she can retain the in-school subsidy for her Perkins loan by leaving it out of the consolidation. The Perkins loan also enjoys a 9-month grace period.

Option 2
If Sidney wants to minimize monthly check-writing chores, she might consider including her Perkins loan in the consolidation loan. Under this option, her combined student loan payment would total $217, giving her an extra $21 a month to pay toward her credit card debt. That may not sound like much, but it's enough to enable her to repay that $11,000 in just over 3-1/2 years. She'll be able to pay off that credit card debt even faster once she gets a roommate and can free more income for debt reduction. Also, she may be less likely to be late in making her loan payments.

Sidney should also be able to take an interest tax deduction when filing her federal income tax returns. During the first year of repayment of her consolidation loan (including the Perkins), she can expect to pay nearly $2,000 in interest, assuming all of her payments are made on time. By including her Perkins loan, she can lock a consolidation rate of 5.375 percent for 25 years. By increasing her credit card payments,

Sidney will reduce the amount of interest charges she pays to the credit card company. The credit card interest is NOT deductible.

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