Reader Question: My GF is burdened by enormous student loan debt and it is impacting my life as well.

She has a mixture of private and federal loans, mostly private so the income based payment plans and such do not apply. I was suggesting she consolidate them, which would take the current amount and bring it back to 25-year terms, which would lower the payment and make life a bit less burdensome. Granted she’d pay more in the long run but at least it wouldn’t be a $1000/month payment as it is now.

Many places aren’t consolidating and for private loans, you can only do a variable rate. I’m curious to your experiences and if you can shed some light on how you handled your debt, other than making extra payments to pay off earlier.

My husband and I consolidated our loans (separately from each other) before the new consolidation laws took effect, but much of what the reader says holds true for private loans. Here’s how it works:

Federal Loan Consolidation
When we consolidated, we were able to combine our Federal loans into one loan with an averaged fixed interest rate. For example, my rate is 2.85%. My husband’s rate is higher because some of his original loans had much higher rates. Then, with on-time payments and auto pay, we were able to reduce our interest rates by .25 to .5% after 36 months. So, actually my rate is now 2.35%. Not too shabby! This was, of course, before the changes to the law that made the new base rate significantly higher. This law makes me a bit stabby, but that’s another post.

You can still consolidate Federal student loans, but only with the Direct Loan program. Private lenders no longer offer federal consolidation. Your rate may not be reduced much because of the new mandatory rates, but you will get a single payment and a longer term, which lowers the monthly payment.

Private Student Loan Consolidation
Private student loan consolidation is trickier. You can’t combine your federal and private loans into one consolidation, so my husband has two consolidations – a private and a federal. He also has a couple of small standalone loans that couldn’t be consolidated. Although the loans are consolidated, the rates are still variable. However, we only have one payment for the bulk of those loans. The benefits of consolidating are threefold:

1. We don’t have to track 15 different loans (three years of professional school, plus four years of undergrad produce a lot of loans!)

2. We get a longer term. Rather than the original 10-year term that most of those loans came with, the term is 30 years. We’ll pay them off faster if we can, but it gives us breathing room.

3. Co-signers are removed. I’m still a co-signer on one of my husband’s smaller, non-consolidated loans, but consolidating removed me from the larger loans, which means I won’t be on the hook if he dies early or defaults.

Options for Reducing Monthly Payments
If you consolidate, get the longest term you can. Usually this is dependent on the amount of the loans, but large balances like those of the above questioner would probably qualify for the longest term.

Even with private consolidation, you can ask for a graduated payment plan. That reduces the payment for the first few years, but you end up paying more interest in the end. Our payments are set to jump $500 next year because my husband’s graduated payment plan is converting to a full payment plan. We’re already budgeting for that eventuality, and it’s one reason we bought our house when we did.

If you’re interested in a private loan consolidation, start by contacting your lender to see if that option is available and which loans can be consolidated into it. Although you may not get them all, getting at least some will help.

I’m buying a new car this weekend. My husband and I considered spending our entire emergency fund to pay cash for the car, but then we took a look at the budget and decided it was too big a risk. So, we’ve decided to get a car loan. Rates are pretty reasonable right now for people with our credit.

Car Loan Sources
You can get a car loan from various sources. Dealers may or may not be a good option. I also checked out credit unions and big banks.

Dealer Loans
Obviously, a dealer wants to give you the loan because they make more money that way. However, a dealer may not be the best option. The Mazda I considered came with 0% financing from the manufacturer. I seriously considered that offer, because our credit allows us to qualify for it. Ultimately I decided I liked a different car better, but it was tempting. Toyota was offering 2.9%, which is also better than bank rates. If you have great credit and can qualify for those rates, then dealer financing is probably the best option.

Credit Union Loans
Traditionally, credit unions have lower auto loan interest rates than banks. The credit unions I investigated were at 4.49% for loans over $15,000. After tax, title, and license in California, any car I buy will exceed that number. However, rates vary by location, so a credit union should be high on your list for potential car loans. If your credit isn’t great, a credit union should be your first stop for reasonable rates.

Bank Loans
If you have good credit, you should also check out rates at your local bank. I discovered that Bank of America was offering rates as low as 3.49%. I ultimately qualified for a 3.7% loan. The car I opted to buy has 3.9% dealer financing, so I’ll definitely be using my own financing. However, bank rates are usually much higher if you have poor credit.

Loan Co-Signers
My husband will be co-signing my loan. Since we’re married and co-responsible for the debt anyway, there’s no risk in this situation. However, you shouldn’t co-sign a loan, or ask someone to co-sign your loan, if you’re single. No matter how good your intentions are, there is always a risk of that you’ll run into trouble and someone else will get stuck with your payments or see their credit dinged. Friends don’t ask friends to damage their credit! If you can’t qualify for the loan on your own, you need to buy a cheaper car. Consider a used car, even.

On the flip side, many an unmarried couple has purchased a car together, or with one partner as a co-signer, only to break up later. What happens if your partner has financial trouble after the break-up and you get calls from debt collectors for property you don’t possess?

How the Loan Process Works
About a week before you go to buy the car, apply for a loan online. I received instant approval, but the bank called the next day to review the terms and explain how it worked.

Once you get to the dealer, you should do your best to be in control. First agree on the price of the car. Never focus on the monthly payment as part of the negotiation unless you want to get screwed.

Next, you can ask about dealer financing if they have incentive offers going and you want to consider that route. Have backup financing ready, though, just in case you magically don’t qualify for that awesome rate.

The dealer will run your credit and come back with some numbers. If you agree, you’ll go to the financing office and sign the papers. If you don’t agree, tell them you have your own financing.

Some banks already have arrangements with certain dealers that streamline the process. If your bank and dealer don’t have a deal, the bank will provide you with instructions. You’ll still have to go to the finance office to sign papers. This is also where they’ll try to sell you more stuff.

When my husband bought his car, he paid cash for the whole thing. The dealer still tried to convince him to finance, with a rate of 9.9%!

If you want to check out loan rates, start at Bankrate.com or Edmunds.com for lists of local rates.

If you’d like to get a free refinance, also called a no-cost refinance, I would start by calling a local broker. If you don’t know a broker personally, ask around. Someone you know does. Call them up and explain your current loan balance, interest rate, and income. Tell them you’d like to know if they offer a free or no-cost refi.

How Can It Be Free?
Obviously, it’s not really free. You pay a slightly higher interest rate for not having costs. Usually 1/8 of a point. In most cases, that’s not a big deal, but you should run the numbers to make sure it makes sense in your situation.

You should also make sure that the loan value is equal to or lower than your home value. In our case, both our appraisals came in higher, one substantially higher, than our purchase price. Actually, I think the second appraisal was too high. There’s simply no way my home value has increased 6% in the last year, even with the window treatments and new paint. But whatever, it got me my refinance.

If you need to pay down your mortgage to qualify for a refinance, determine whether you’ll really save that much money and have enough cash to pay the difference without completely draining your emergency fund.

When Should You Refinance?
Keep an eye on mortgage rates. Right now, they’re at record lows so it’s a great time to refinance. Keep in mind that the averages you see are just that: averages. Unless you pay points or costs, you won’t get the absolutely lowest rate available. Also, if you have a conforming jumbo or jumbo loan, your rate will be higher. You may hear rates being advertised on the radio that are much lower than yours, but those are reserved for loans below $417,000. If you’re close to that, ask your broker if paying down the mortgage to get below that magic number will reduce your rate.

What Kind of Mortgage Should You Get?
It really depends on your budget. Obviously, in this market a fixed rate is the best way to go. Today’s low adjustable rates will rise, but a fixed rate is a fixed rate for the term of the loan.

There is the question of a 30-year mortgage vs. a 15-year-mortgage. If you’re in the first couple years of your loan, a 30-year loan is probably the most doable. If you’re halfway through, then a 15-year-loan will help you save money on interest, both by reducing your rate and reducing the interest paid over the term.

If you’re at less than fifteen years, take a close look at those numbers again. How much interest do you really have left on the loan? Make sure your the total interest over the life of the loan will be less than you’d pay in total with the original loan. Finally, you can refi to any term, but continue to pay the same amount you did before, which will allow you to pay down your mortgage faster.

Crazy like a fox! Yes, just one year after closing on my original purchase, I’ve refinanced my mortgage twice. It cost me nothing but a little bit of time and paper, but the combined refinances will save us $160 a month on the mortgage. Over ten years, that’s a whopping $15,000!

How I Got Two No-Cost Refis in Six Months
I have a mortgage broker friend. He emailed me about four months after we closed on our first loan to let me know he could get me a free refi that would drop our rate by a quarter point. At the time, this was a fantastic deal.

We sent him our bank statements, got the appraisal, and then he sent a notary to our house to sign the papers. We closed right before Christmas.

Fast forward five months. After rising slightly, interest rates started falling drastically. My mortgage broker friend emailed again, with another free refi offer. This time he could get us down to 5% even. I confirmed that we could refi while my husband was on disability. He checked and said yes, so we started the process again.

Fortunately, the answer turned out to be no. We were midway through the process when we had to call a halt. I say fortunately, because rates continued to fall. About six weeks later, my husband was back to work full time and we had a full-time paystub to send over. The appraisal was still good, and in fact our loan paperwork was still in the system. Even better, we could now get a rate of 4.875. We closed within ten days of restarting the process.

What about the Extra Year of Interest?
Both times we refinanced into new 30 year mortgages. We didn’t add to our loan balances, so the equity we’ve accrued over the past year is still ours. We did essentially “lose” that extra year of interest we paid, however it’s not a big concern for me for three reasons:

First, we don’t plan to stay in the house for 30 years. I imagine we’ll be here about ten. It doesn’t make a difference at that point whether we’re at year nine of our loan or year ten. The loan balance is the same.

Second, if we did somehow stay in the house for more than ten years, by that point we should be able to make catch up payments. We’d have $24,249 in interest to make up, but it’s still doable if we spread it out over a couple of years.

Third, over thirty years, the interest savings is $25,640, so even if we stayed thirty years and never made catch-up payments, we’d still save $1,400 in interest.

Why Not Pay Costs?
Both times we could have paid the closing costs to get the rate down another 1/8 of a point. We opted not to because the additional savings weren’t significant enough to save us a big chunk of change. We’d rather keep that money in our pockets, thank you!

Why Not Wait?
We could have waited a little longer to see if rates fell further, but I also need to buy a new car. It looks like I’ll be buying it in the next two weeks. I wanted that refi done before I started applying for car loans.

So now you know my story. Tomorrow I’ll tell you how to get a free refi of your own.

In addition to some people opting to walk away from their mortgages, the temptation to default on student loans is growing. Unfortunately, defaulting on student loans can have even worse consequences than defaulting on a mortgage. So, let’s go over what will happen if you default, and options for avoiding default.

What Qualifies as Default?
The government gives you many chances to keep up on your student loans. You only enter default if you fail to make any payments or repayment arrangements for 9-12 months.

What Happens If You Default?
Unlike some types of debt that will eventually become stale if you just ignore them, federally-subsidized student loans will follow you for the rest of your life. As long as you’re in default, you will not be able to qualify for a mortgage or any other type of loan, including future student loans. You may be turned down for jobs because it will appear on your credit report. The government or your lender also has the option of garnishing your wages or tax refunds in order to be repaid.

Can You Negotiate a Lower Payment When It Goes to Collection?
Student loans are not like any other kind of debt. Once it enters collection, the costs only increase. You will not be able to negotiate a lower pay-off balance. In fact, you will be responsible for all of the collection costs as well as penalties. Depending on the type of loan, you will owe an additional 25%-40% of the balance. The financial aid website explains more about the collection costs.

Can Student Loans Be Discharged in Bankruptcy?
In very, very, very, very rare cases, you can have your student loans discharged in bankruptcy court. Unfortunately, you have to prove that there is no way you can ever repay your debt, which typically requires that you be severely disabled.

Can You Apply for Loan Forgiveness?
Direct federal loans may be forgiven after 10 years of public service. Only certain jobs qualify and you have to make 120 payments after 1997 to qualify, but if you’re interested in that route, visit FinAid to learn more.

Are There Alternatives to Defaulting on Student Loans?
Fortunately, your lender has many options to avoid defaulting on your loans. Your first option is deferral. Your loan can be deferred for a specific period of time. If you’re returning to school, some loans won’t accrue interest while you’re in school. Other loans will accrue interest, but you won’t be required to make payments. Members of the military on active duty are eligible for special deferrals. Financial hardship deferrals are also available. If your situation is so severe that a deferral isn’t sufficient, lenders also offer forbearances. Interest accrues during a forbearance and you are responsible for paying it, but you won‘t be responsible for the full payment amount until the end of the forbearance. Some types of forbearance simply reduce your payments while others suspend them. Your lender will review your finances to determine the most appropriate option for you.

If you’re at risk for default, the first thing you need to do is contact the lender or consolidator who currently holds your loans to discuss your options. They will help you apply for a deferral, a forbearance, or a new repayment plan. Don’t risk your financial future by defaulting on your student loans – it will only make things worse.

If you haven’t already consolidated your federal student loans, then you’re currently out of luck. Due to Congressional budget cuts, most student loan issuers have decided it’s not economical to consolidate federal loans. You can consolidate private loans, but it’s more difficult. Nevertheless, you can find ways to save money on student debt. Here are my tips for saving money on your student loans, and my thoughts on a popular method you should avoid.

Set Up Automatic Student Loan Payments
Many lenders offer interest rate reductions when you set up automatic debits through their website. My lender reduces my interest rate by a quarter point. I did have to call them to sign up for the service, but once it was active, I started saving instantly. I also never have to worry about missing a payment because the money is automatically zapped from my checking account.

Always Pay On Time
In addition to avoiding late fees, paying on time could also result in an interest rate reduction. My lender offers a half point reduction after 36 on-time payments. Since my payments are automatic, they’re never late. I expect to see the reduction in October 2009, which will bring my rate down to 3.12%.

Overpay If You Can
One of my husband’s student loans has a variable interest rate, and the payment amounts change with it. Interest rates have fallen significantly recently, so the payment due has also fallen. He keeps paying the same amount, though. He’s now overpaying by $40-50 a month without impacting our budget at all. The lender is currently applying the overpayments to future interest, but soon they will start buying down the principal.

Pay Down Principal with Financial Windfalls
If you receive a windfall, use it to pay down the principal on your student loan. You might have to mail a check with a note indicating that the payment be applied to the principal. By paying down principal, you reduce the total interest over the life of the loan, which amounts to a substantial savings. Of course, you should only do this if your credit cards and other higher rate debts are paid off.

Don’t Pay Student Debt with a Home Equity Loan
If you do have federal loans, then you should keep them as student loans. Not only are they discharged if you die before they’re repaid, but they offer forbearances and deferrals if you experience a hardship. Private loans don’t offer these same advantages, but you shouldn’t use the equity in your home to consolidate student loans. If you fall behind on your payments, you could lose your house. That’s too big a risk.

Even though my husband and I plan to pay off a few of our loans this year, we still have a huge chunk of student debt. Saving just a little on them every month makes us feel a little better about the burden.

Edited to add: apparently you can consolidate federal loans through the government’s Direct Loan program if certain conditions apply.  Go to the Direct Loan to see if you qualify.

Recently someone reached my blog via a term related to foreclosure. I don’t really have anything about that specific topic, so I thought I should add something. If you’re facing foreclosure, the most important thing to know is that you do have options. I don’t think people should just walk away from their mortgages – I’m a firm believer in personal responsibility and honoring contracts. Nevertheless, all the news about the mortgage meltdown has made some people decide that walking away is the only solution. Here are the other options:

Mortgage Refinance
I know not everyone is able to refinance, especially if their homes are underwater (the value is lower than the loan balance), but it should be everyone’s first attempt to resolve the situation. Although I’m opposed to the new mortgage bailout programs being proposed, you should look into it if they become law.

Forbearance
If you’re behind on a couple of payments, but can catch up, contact the lender for a forbearance. They’ll typically add the payments to the end of the mortgage. You may more in the end, but it’s better than losing your home and having to start over.

Loan Restructuring and Other Options
Some people have reported that their lenders don’t want to talk to them about restructuring or modifying their loans. If you can’t refinance and a forbearance isn’t enough, you may want to contact a reputable company to review your foreclosure options and negotiate with your lender. Lenders that won’t bargain with homeowners may be more willing to bargain with a professional whose emotions aren’t involved and who knows what to ask for.

Finding a Reputable Foreclosure Service
Once your notice of default is published, you’ll start getting phone calls, letters, and even knocks on the door from people offering to “rescue” you. Sometimes these are scams. Instead, you should be proactive and search for a foreclosure company on your own. I would start with a simple web search for “foreclosure services” or “foreclosure help.” Then I would investigate them with the Better Business Bureau and HUD. If you have an FHA mortgage, contact them to discuss your options.

Scams to Watch Out For
A scammer’s main goal is to steal whatever equity may be left in your home, or to find some way to profit from your loss. When dealing with a foreclosure service, look-out for the following things:

Signing over your deed. Never sign your deed over to anyone. Often the scammer will offer to pay off the property if you sign over the deed temporarily. In some cases, they suggest a lease-buyback scheme, but the amount you’d need to pay to buy it back is more than the original loan. In another situation, they collect your rent checks without paying off your mortgage, leaving you with both expenses. In a third situation, they’ll sell your house out from under you and take whatever equity existed.

Excessive fees. Some services charge very high fees for even the simplest of paperwork. If it’s something you could do on your own, don’t pay someone else to do it.

Pressure to sign now. Although you may have to act quickly, you should have at least a couple of days to think over the offered solution. If you’re told that the offer will be withdrawn if you don’t sign now, just walk away.

Repeated refinancing. Each scam refinance includes padded fees for everyone in on the scam, leaving you with a bloated mortgage balance and nothing left to pay it with.

Despite the scammers, you can still find reputable help. You can also go it alone. With mortgage defaults on the rise, more lenders and government agencies are willing to help you keep your home.

There are two kinds of personal loans – the loans you receive from banks and the loans you receive from individuals. For most people, personal loans from individuals take the form of family loans, but they can also be fraught with tension. Now, you can also give or receive personal loans to people you don’t know. Prosper and the Lending Club are two of the top sources for personal loans. Virgin Money is the leader in the field of family loans.

Prosper Personal Loans
Prosper is a loan servicer that facilitates personal and small business loans between strangers. Borrowers receive a lower interest rate than you would from a bank or credit card company. You can borrow up to $25,000 for debt consolidation, a car, a business, or almost any other purpose. You create a loan proposal and then individuals bid to fund it. You make the payments to Prosper, which then distributes the proceeds. According to Prosper, they have an average annual rate of return of 6.18% to 8.52% and a default rate of 1.44%. They have been in operation since February 2006 and have issued 5,427 loans.

Borrowers undergo thorough credit checks and must adhere to lending standards. Prosper then rates the loans from AA to HR. The lower the rating, the higher the interest rate and rate of return.

For investors, the upside is the chance to help someone while also receiving a high return on their money. You can spread your risk by loaning small amounts to a variety of people rather than a large amount to one person. The downside is that there is no guarantee the loan will be repaid. The same could be said of a stock market investment, though.

For borrowers, the upside is the lower interest rate you pay. You also receive the loan anonymously, so your friends and relatives don’t have to know about your debt. The downside is that you only have up to three years to pay it back. With credit cards, you could probably spend forever paying it off and your creditor would be happy to let you do just that.

Lending Club Personal Loans
The Lending Club is very similar to Prosper. The risks are the same. They claim an average rate of return of 12.38%. Their default rate is 0.0%. However, they have only been making loans since May 2007 and have only issued 928 loans.

Lending Club requires borrowers to have a minimum credit score of 640. Based on the borrower’s credit history, the loan is rated A through G, with A loans receiving lower interest rates and having less risk.

The upsides and downsides are the same as they are for Prosper.

Virgin Money Family Loans
Virgin Money is owned by Virgin, but was formally an independent company known as CircleLending. Rather than manage loans between strangers, they facilitate loans between friends and family members. In addition to personal loans, they also manage mortgage loans and student loans. These are true family loans, which means everyone knows everyone.

The old adage says that you shouldn’t lend money to friends and family members, yet thousands of people do every year. Parents loan to children, uncles loan to nieces and nephews, friends loan to friends. Many of those loans lead to strife because the lender sees the borrower spending money and wonders why their loan wasn’t repaid instead.

Virgin Money’s goal is to take the stress out of family loans. You choose the interest rate and the payment schedule, and they complete the paperwork and tax documents. They can also service the loan for an additional fee. They do recommend adhering to the Applicable Federal Rate (currently 3.18%) for loans over $10,000 in order to avoid having the funds classified as a gift by the IRS, but you can choose a rate of 0%.

The downside is that you’re introducing a third party into a family or friendship. For business investments between friends and family members, this is probably a great idea because it confirms the business relationship. I don’t know if my parents would have wanted to use a service like this to loan me college funds (which they later forgave.) They’ve also said they’ll help my husband and me with our down payment, but we don’t want to have strict repayment terms governing those funds. We expect to pay it back, but we don’t know when and we don’t know how quickly.

The other downside is the loan fee. Virgin Money charges fees ranging from $99 to $2499 depending on the type of loan and level of servicing. Depending on the size of the loan, that could be a substantial cost.

Personally, I might consider Prosper or Lending Club for investment purposes, but my relationship with my parents is good enough that I wouldn’t want to involve Virgin Money in the family loan process.

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