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The Honolulu Advertiser
Posted on: Sunday, April 3, 2005

Student loans still a deal

By Deborah Adamson
Advertiser Staff Writer

Caroline Fuiava wants to be a laboratory detective.

Chaminade students Caroline Fuiava, left, and Erin Smith are looking into consolidating their student loans before interest rates get higher.

Jeff Widener • The Honolulu Advertiser

The chemistry and forensics science senior is studying DNA identification, fingerprint matching and blood spatter analysis. One day, her behind-the-scenes work may help put criminals behind bars.

"I got interested when I was a sophomore in high school, when we went over DNA. Then I saw (the hit forensics CBS-TV show) "CSI" and I thought, 'That's cool,' " said the 25-year-old Chaminade University student. "I would be like Greg (Sanders, played by Eric Szmanda). He's the one who stays in the lab."

After she graduates in May, she plans to pursue a master's degree in forensics science.

But her dream won't come cheap.

Fuiava will likely have to borrow more than the $10,000 she already owes on student loans. She took out those loans to supplement her undergraduate scholarships from Kamehameha Schools.

Lately, she's been bombarded by offers from lenders to consolidate her student loans.

Financial experts say it would most likely be a wise move.

Interest rates on student loans have fallen to their lowest level in 40 years, said Lorraine Teniya, Hawai'i manager for Indianapolis-based USA Funds, the nation's largest federal student loan guarantor. Consolidating allows you to lock in your current rates and take up to 30 years to repay your loans.

Since most student loans have variable rates and must be paid off within 10 years, consolidating is the smart way to go when interest rates are relatively low, financial advisers say.

It is almost certain that student loan rates will rise when they go through their annual recalculation on July 1. That's because the variable rates are pegged to the 91-day Treasury bill, whose yields have been going up as the Federal Reserve has hiked short-term interest rates.

By consolidating you can avoid an increase in your rate and stretch out your repayments if needed.

Consolidation, it should be noted, is a bit of a misnomer. You can consolidate even if you only have one loan. It just means you will be converting that one loan into a new loan, with certain restrictions.

Erin Smith, a senior at Chaminade, said his federal loan payment would drop to $300 a month from $700 by extending it to 30 years. He owes $48,000 on 12 loans he already took out and plans to attend graduate school.

"It (the monthly payment) drops from a mortgage payment to a car payment," said the 41-year-old.

You can consolidate your student loans anytime after you begin repaying the loan. Consolidation is available on several different federal student loans, including Stafford, PLUS, Perkins and others. (For a list, go to the U.S. Department of Education's Web site at www.loanconsolidation.ed.gov/borrower/bloans.shtml.)

You can only consolidate your existing loans once. But if you take out a new loan after consolidating, you are allowed to consolidate again to pull in the new loan.

One advantage of consolidating at the current record low rates is your rate will be locked in. Two of the more popular student loans — Stafford and PLUS — carry variable rates which would rise as interest rates climb.

"If you can afford to pay off the loan, you should do so. If you can't, it's better to consolidate," said Eric Nemoto, director of financial aid and associate dean of enrollment management at Chaminade.

Another reason to consolidate now is that several bills are making their way through Congress that would make consolidated loans carry variable rates, according to USA Funds, the company contracted by the federal government to guarantee student loans. Federal lawmakers are aware that record low interest rates are making consolidated loans an expensive benefit, since the government subsidizes lenders for making low-interest loans.

In a loan consolidation, you can select any lender from among a federally approved list. In most cases, it is easiest to stick with your current lender. The lender then pays off the federal loan and issues you a new loan. Interest rates are set at the weighted average of the rates on federal loans being consolidated, rounded up to the nearest one-eighth of 1 percent, Teniya said.

That means consolidation loans typically charge a slightly higher interest rate than your current loans.

Currently, Stafford loans charge an annual rate of either 2.77 percent or 3.37 percent, depending on whether or not you're still in school. The PLUS loan, which parents take out, currently stands at 4.17 percent.

So a consolidation loan rate could be as little as 3.375 percent, assuming you have one Stafford loan.

Interest rates on Stafford loans are capped at 8.25 percent while PLUS is set at 9 percent. Perkins assesses a fixed rate of 5 percent.

In Hawai'i, students carry an average of $8,000 student loans, Teniya said. Annually, Hawai'i students take out more than $100 million in federal and private student loans.

Here are some tips on consolidating your loans:

• Start with your current lender before looking around, since you already have a relationship with them. Qualified lenders must have agreements with the U.S. Department of Education. Alternatively, the federal agency also makes these loans directly to students.

• Do not pay an up-front fee to consolidate a loan.

• Ask how you can qualify for discounts. Some lenders will lower your interest rate if you let them automatically deduct your payment from your bank account.

• Read the fine print to make sure you don't lose any perks. For instance, Perkins loans may be forgiven if you enter certain professions. Consolidating your loan might take away this benefit.

• While it's tempting to extend your repayment term to 30 years, do it only if you can't afford the monthly payments. That's because you'll be paying more in interest over 30 years than the 10 years required by federal student loans.

To calculate your monthly payments under different scenarios, go to the Education Department's Web site at www.loanconsolidation.ed.gov. Click on "borrower services" and "online calculator."

• Unless you expect to be strapped in your first job after college, choose to repay at a fixed monthly rate.

When you consolidate, you will be asked to choose whether you want payments to remain the same over the life of the loan, or you want them to start out low for the first few years and go up afterwards, when presumably you'll be more established financially.

Choose a fixed payment because the graduated payment options will end up costing you more.

• Give priority to paying off your student loans. They don't disappear with bankruptcy.

Reach Deborah Adamson at dadamson@honoluluadvertiser.com or 525-8088.