Pay Less on Your Student Loans

Finishing college means you're finally on your own. Unfortunately, it also means you'll have to start paying off your student loans.

Managing your student loan portfolio can be just as challenging as managing an investment portfolio. Many students get several different types of loans throughout their college years, often from different banks using different programs. Each of those loans might have its own set of rules governing when you have to start making payments, when interest starts to accrue, and what interest rate applies. You might even have to write several checks each month just to stay current on your loans.

Prepare to be courted

Banks know that paying off loans is a new experience for most graduates. That's why you can expect to get offers to consolidate all your student loans with a single lender.

There are many reasons why you'll be tempted to consolidate. Consolidation loans give you a chance to make a single payment, making it easier to manage your debt. Many lenders will give you repayment options that let you reduce your monthly payments -- a big incentive when you're trying to make ends meet with an entry-level paycheck.

Lower rates -- maybe

If you look for information about consolidation on the Internet, you'll find a lot of outdated information about lower rates. Several years ago, consolidation could give you a big rate cut on your loans. Now, though, interest rates overall have risen, and you're much less likely to find big savings through low rates.

Many lenders do offer rate discounts for good behavior. For instance, lenders like Sallie Mae (NYSE: SLM), Fifth Third (Nasdaq: FITB), and Bank of America (NYSE: BAC) give qualified borrowers a 0.25% discount if they use automatic payment from their bank accounts. Sallie Mae also gives some borrowers a 1% discount after making 36 on-time payments. If you qualify, KeyCorp (NYSE: KEY) will reduce the total amount you owe by 3.75% if you make your first 36 payments on time.

Earlier this year, the House passed the College Student Relief Act of 2007, which would gradually cut rates on new loans in half. However, the bill would apply only to future loans, not existing ones. Moreover, the Senate has not yet considered the bill, so there's no guarantee it will ever become law.

Read the fine print

Before you yield to the temptation to consolidate, understand that you may be giving something up. For instance, many federal loan programs have useful features that you may want to use. If you decide to go back to graduate school, some loans will let you defer making payments. Other loan programs may even forgive all or part of your debt if you agree to work in certain professions, including teaching low-income or disabled students, some legal and medical jobs, or joining the military or the Peace Corps. Those features may not be available if you consolidate.

In addition, there are often tradeoffs you have to make for the convenience and ease of consolidating your loans. Those lower payments may look nice, but they might extend your repayment period from 10 years or less to 20 or 30 years.

Also, look at the interest rates you'll be charged and how they're calculated. Even if the rate is currently lower than what you're paying on your loans, be sure to ask if that rate can ever change. If you have a variable-rate loan, you could end up with the same problems a lot of homeowners are facing with their adjustable-rate mortgages. In general, any reduction in your payment will probably come from lengthening your repayment period.

Don't hurry

Lenders offering consolidation loans may try to persuade you that you have to act quickly, but don't let yourself get bullied into making a major financial decision. Take the time to understand all the pros and cons before you choose what to do. After all, you don't want the first choice you make on your own to be the wrong one.