Student loan saga: the next chapter

This post is from staff writer Honey Smith.

Both good news and bad news since my last update on student loans. As I may have mentioned before, after five years in my doctoral program, I thought I was going to graduate, so I consolidated all the student loans I had at the time. Because of the way student loans and consolidation worked at the time, I ended up getting a pretty good deal.

A little student loan history

Those of you who took out loans in recent years may not know this, but from 1998 to 2006, Stafford loans were issued at a variable interest rate (based on the Treasury bill price). Then, starting in 2006, loans were issued at a fixed rate of 6.8 percent. This seemed like a good deal at the time, because in 2006 the variable rate on already-issued loans was 7.14 percent.

When you consolidate student loans, the interest rate for the new loan is the weighted average of the interest rate for all the previous loans (I believe it is the average plus one-eighth of a percent). For folks like me who had a mix of pre- and post-2006 loans, consolidation was a complicated decision based on a variety of factors:

• The current interest rate of your variable loans (which reset every year on July 1)
• How much longer you thought you’d be in school (since you can only consolidate once)
• How many different servicers you had (and thus, how many different payments you had to track each month)

When I consolidated, my balance ended up with an interest rate of about 4.5 percent. Pre-Great Recession, that was looking pretty sweet. New loans were being issued at the significantly higher rate of 6.8 percent.

Since the economy tanked, however, a 6.8 percent interest rate doesn’t look so good. This is part of the reason that in the 2011-12 academic year, Congress voted to temporarily change the interest rate on subsidized Stafford loans to undergraduates to 3.4 percent.

Note: Unsubsidized loans issued to undergraduates as well as all Stafford loans issued to graduate students were still at 6.8 percent in 2011-12. Additionally, starting in Fall 2012, graduate students are no longer eligible for subsidized Stafford loans.

Special consolidation offer

After my consolidation, for a variety of reasons, I ended up not graduating for another year. I also ended up taking out one more semester of loans (fortunately I got my current job before I graduated, so it wasn’t two semesters’ worth). However, because you can only consolidate Federal loans once, this meant that 1) I had two balances, and 2) my second balance was originated and held by a commercial servicer.

Had I waited to consolidate, not only would I have been able to roll all my loans into one payment, my interest rate would have probably been a full percent lower. Additionally, my grace period would have been extended for another six months, so I would have had more time to build up an emergency fund before entering repayment.

The timing of all this is actually one of the great frustrations of my life. However, timing it all perfectly would have required psychic powers. Perfection is a dangerous thing to strive for, anyway. There’s nothing I can do about it now except pay everything off as quickly as I can. Or so I thought.

Then, on June 18, I received the following email:

You have been previously contacted by one of the U.S. Department of Education’s loan servicers – FedLoan Servicing, Great Lakes Educational Loan Services, Inc., Nelnet, or Sallie Mae – about an opportunity to apply for a Special Direct Consolidation Loan. We are writing to you now to remind you that the opportunity to apply ends June 30, 2012.

Right now you have two or more federal student loans – at least one of which is handled by a Department of Education loan servicer. By consolidating some of your loans, you can simplify your loan payments so that you only have to make one payment per month.

While the traditional consolidation program will continue to be available after June 30 for consolidation of all your eligible federal loans, if you consolidate some of them now into a Special Direct Consolidation Loan, you will receive a 0.25% interest rate reduction from the current interest rate on each commercially held Federal Family Education Loan Program (Honey’s note: FFELP) loan as of the date it is consolidated. You may also be eligible for an additional 0.25% interest rate reduction if the loan is repaid through the servicer’s automatic debit system.

To take advantage of this opportunity, submit the online application for this special loan consolidation opportunity by 11:59 P.M. (ET) on June 30, 2012.

To find out more click here today.

Thank you,

U.S. Department of Education

Let’s get one thing straight right off the bat: I had not been previously contacted (surprise, surprise). There was good news hiding in there, however: consolidating would reduce my interest rate from 6.8 percent to 6.3 percent. I submitted all the required documents by the deadline and waited.

And waited.

And waited.

This morning (over four months after I submitted my application), I received a ping from Credit Karma that a new account had been opened in my name. I logged in to Credit Karma and saw that the new account was with a Federal Direct student loan servicer.

I have accounts at several of the Federal Direct servicers because I’m still in their systems from my loan-origination days under FFELP, and this happened to be one of them. So I was able to log in right away and saw a balance that matched my unconsolidated loan (more or less…actually, more, as I explain below). Then I logged in to my commercial servicer’s account expecting to see a zero balance.

Where it gets tricky

I didn’t see exactly what I expected. First, before my loan was transferred, I was charged $260.36 in “debit adjustments” that were added to my principal balance. So the balance on this loan increased from $5,092.25 to $5,352.61. Argh, setback. Second, I still had a balance with my commercial servicer in the amount of 17 cents.

I tried to submit an extra payment to pay off the balance, but was thwarted. When I tried to submit a payment in the amount of 17 cents, I got an error message that electronic payments must be at least a dollar. When I tried to submit a payment in the amount of a dollar, I got an error message that I cannot submit a payment in excess of the balance due.

Round and round we go again!

I suppose the thing to do at that point would have been to send in a physical check, but instead I added the servicer as a payee to my checking account’s online bill pay and submitted a payment in the amount of a dollar. Since forever stamps cost 45 cents these days, I wouldn’t have saved that much after you also account for the cost of the envelope and check. We’ll see what happens next.

The other thing that was strange to me is that the special consolidation loan is with a different servicer than my original, large consolidated balance. I assumed that the Special Direct Consolidation would roll everything into one loan. I guess I was wrong, though it makes sense now. Re-consolidating would probably have been a really labor-intensive action (read: unlikely to be undertaken by the federal government).

This is fine with me, actually, for a couple of reasons: 1) rolling my small loan into my big loan would raise the interest rate on the big loan, which I don’t want, and 2) keeping this smaller loan separate makes it the perfect medium-term goal, which will be the subject of my next post!

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This article is about Debt, Education