Choosing a Lender for Loan Consolidation

by Barbara Swichtenberg
SDN Staff Writer

There are many lenders competing to meet your federal student loan needs, all with different terms and benefits. Which one is right for you? There are a few things you should know to help you choose.

Choosing a Lender for your Stafford and PLUS Loans

You have filled out your FAFSA and received your award letter — now it’s time to pick a lender. If your school is a Direct school you can only get your loans from Uncle Sam. This takes away the burden of choosing a lender but Direct loans do not offer much in the way of repayment incentives after you graduate. That’s not all bad though, you can still consolidate with a different lender once you graduate to get some interest rate reductions.

For non-Direct schools you have to choose from the over 3000 lenders that are capable of issuing federally backed loans. This can be a daunting task but there are a few things that can narrow them down.

• If your school still has a preferred lender list, start there. Ask the financial aid office how they screened the lenders on the list. Do they have an arrangement with them or were they chosen by performance? Some lenders will set up a fast-track system with schools to make the loan process easier on them so they are put on the preferred list. But that doesn’t benefit the student in any way. Remember: you are not required to choose a lender from this list. Federal law guarantees you the right to use any lender you wish, but your school may have some insight on the lenders on their list.
• Talk to your fellow students. Who did they use and were they happy with them?
• Use the Internet – research any lenders that look promising.
• Don’t forget your credit union if you or your parents are members.
• What origination fees do you have to pay?
• Do they offer deferral throughout residency?
• How easy is the application process? Can you apply online? How long do you have to wait to find out if you are approved?

Ask plenty of questions, take notes and arm yourself with as much information as possible. Keep in mind that lender’s terms and benefits may change over time so it is a good idea to look around every year at potential lenders. There is no inherent benefit to keeping the same lender all through your schooling — especially if you plan to consolidate after graduation. So if you find a better deal – take it!

Choosing a Lender for Your Federal Consolidation

You may choose to consolidate with your original lender but chances are you can find a better deal by shopping around. It doesn’t require any more work on your part to use a different lender for consolidation and will only add about 2 weeks to the process. Find the best deal you can, whether it’s from your current lender or a new one.

The fixed base interest rate for a consolidation loan is determined by a federally mandated weighted average calculation that every lender must use. The base interest rate should be the same no matter which company you speak to. The term of your loan is also determined by the federal government based solely on your loan balance. Your base interest rate, length of loan and deferral benefits will be the same no matter who you call. So why choose one lender over another? There are three points you should consider when comparing lenders: repayment incentives, the incentive terms and customer service.

Repayment Incentives

The government sets your base interest rate but there’s nothing that says a lender can’t charge you less in the form of repayment incentives. Some common repayment incentives are a percentage off of your interest rate for an automatic deduction from a checking or savings account, an interest rate percentage reduction after a certain number of on-time payments, or reduction or repayment of origination fees. Some companies offer cash up-front rebates for consolidation or rebates after set time periods. The lender should be able to provide you with an amortized repayment schedule showing you exactly what the loan will cost you. This will make it easier to compare lenders with different types of incentives.

Incentive Terms

Incentives aren’t any good if you can’t earn them or keep them. It can be harder than you think to make 24-48 on-time monthly payments. Ask the potential lender what percentage of borrowers actually receive their deductions. Don’t be surprised if it is only 10-20%. The first payment is the most commonly late payment and depending on the lender’s policy you could be disqualified before you even get started.

Questions to ask about their program:

• Once earned, are the benefits permanent?
• If a benefit is lost, can it be re-earned?
• Is there a grace period for late payments?
• Will using deferral or forbearance time affect benefits?
• If the loan is sold, will it retain the benefits?

Customer Service – The Deciding Factor?

• Can the lender provide all the types of loans you are interested in and handle your post-graduation consolidation or will you need multiple lenders?
• How hard is it to get an actual person on the phone?
• Are the customer service personnel friendly and knowledgeable?
• Do they have a Web site with 24 hour access to your account?
• Can you apply online?
• Do they have flexible repayment options?

These are all important questions when choosing a lender. No amount of incentives are worth it if you cannot deal with the company. Be sure to choose a lender who will treat you as a valued customer. This is another area where your school’s financial aid office can be handy. Students will often ask for their help when they have a problem with their lender, and they may be able to tell you some lenders to avoid.

Your student loans are a long-term commitment. Making an informed decision is imperative to your financial future. Start early so you don’t have to rush, gather as much information as possible and make your choice wisely!
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