Federal Student Loan Consolidation

This entry was last updated 6-25-2008

I grew up thinking that I was bad at math, but really I just hadn't ever gotten to the fun part yet (well, the part that saves or makes me money and that is fun). In college I discovered that I love graphs, spreadsheets, and researching financial things. I spent a lot of time researching federal student loan consolidation after I graduated (in 2006) and am happy to share what I learned.

Things to consider when consolidating federal student loans...

·Federal rates won’t change until July of each year. Rates might go lower. Rates will probably be announced in June, leaving you a few weeks to make a decision. * See important note below

·Your consolidated rate will be a weighted average of all federal loans you chose to consolidate. That means with today's rates you can't get the 2.5% rates that people who consolidated around 2002 did. Rates just aren't that low anymore.

·There is hope for your rate, though. Every lender will offer you two interest rate breaks and comparing these breaks is how shopping around pays off! When comparing lenders look for:

1. The greatest % drop with auto-payment. This is an immediate benefit.
   (My lender offered .5% while most offered .025%)
   
2. The shortest amount of time before they drop you 1% for x on time payments.
   (My lender dropped my rate 1% after 12 months of on time payments; most do 18-24 months before you get the 1% drop. Some may do something tempting like a 2% drop after 48 months, but if you are on a 5-year payoff plan mathematically that probably is not be the best choice.)

·If you have a smaller loan at a higher rate consider keeping it out of the consolidation so it doesn’t pull up the rate on the rest of the (cheaper rate) loan (for example if you have a Perkins and a Stafford). No one will advertise that you can leave one loan out, so be savvy.

·Have the money to pay all outstanding interest. You don’t want that outstanding interest rolled into you new principal. (Paying interest on interest is bad!)

·With some lenders, but not all, consolidating eliminates your grace period.

·Consolidating a loan with a forgiveness option (like a Perkins) does eliminate the ability to ever get forgiveness for teaching in a low-income district, etc. You can elect to leave that loan out of consolidation if you are considering taking the forgiveness route.

·Do the hard work of the math when comparing the % breaks. They can be trickier than they look. MrsZubterfuge has a great spreadsheet in the middle of her bio that is helpful for doing long-term calculations. Use the mortgage pages from the spreadsheet in the middle of her bio here to play around with your SL repayment options:
http://community.thenest.com/cs/ks/user/page.aspx?username=MrsZubterfuge

*Important note:

Stafford loans taken out before July 1, 2006 have variable rates that, unconsolidated, will adjust as the rate changes each year. Waiting to see what the new rate effective July 1 will be can be very beneficial in your consolidation timing.

Stafford loans disbursed after July 1, 2006 have a fixed rate of 6.8% in repayment, so waiting to see what the new rate effective July 1 won't benefit you.

Here is a great article that talks about how to approach consolidation going into the 2008-2009 loan year:
http://articles.moneycentral.msn.com/CollegeAndFamily/CutCollegeCosts/3Point6PercentStudentLoansConsolidateNow.aspx

Sites for comparing student loan consolidators:
http://www.simpletuition.com/consolidation/quick_form
http://www.finaid.org/loans/staffordloandiscounts.phtml

USAA Financial Planning – Part 2

This entry is only about finance and not environment.
Review is based on services received from January-July 2007.
If you are new to the blog, start with Part 1, below.

Teleconference 2:
I will admit that though we were supposed to have our second meeting a month after the first one, we waited until our six month contract was almost up to have the second meeting. I had decided to change jobs in that time period and I wanted to get my entire new 403b and pension details from the new employer and incorporate that in as well.

In between our first and second meetings our FP suffered from a back injury and had to go on disability. We were assigned a new FP who called and introduced himself, explained the change, and apologized for the inconvenience.

In the second meeting we went over our revised document and the progress we had made on our six action items from our first meeting. We had a little more difficulty with this meeting. D. and I were considering overfunding our retirement funds in order to purchase a house (it was some crazy scheme that worked out on paper) and the FP had conflicting data on if this would work for us. He spent a lot of time looking up tax details. While it was good he looked up the details, it would have been better for him to have confidently known the answers.

We really hit an impasse with FP over life and disability insurance. I actually felt like he was angry at us for not having the amount he saw fit. He got very stern-fatherly in a way that didn't really work with my personality. I think this was exacerbated by the fact that we had had a similar disagreement with the first FP and got him to reduce it on our plan (and his approach was gentler). Finally, I had to tell the new FP to drop it and move on.
This call lasted about one hour.

With this call (and the end of our six-month contract), our service was complete. We were given an option to continue on at an hourly rate, but declined for now.

We look forward to a "tune-up" probably in two years or when we get ready for a major life change (buying a house or having a baby). In the meanwhile, I will use the information we learned through this process to monitor ourselves.

------------------------
The Overall Good:
The best part is that I feel so much better about being on track for retirement and buying a house. I needed that expert opinion to tell me that my novice research and planning was (mostly) on target. Retirement was a bigger concern than the house, because I just could not, on my own, calculate with inflation, interest, etc. and figure out where we needed to be. The next best thing is that I didn't feel like I was being sold anything. I am wary of being sold a fund or product that benefits the FP more than me, and USAA is extremely clear on how their employees are funded.

The Overall Bad:
I thought the worst parts would be the lack of face-to-face interaction or value-incompatibility, but the FP's personality translated through the phone and the document kept us on the same page (literally and figuratively). So, the new worst is the time it took to get an evening appointment. (Also, if I have a question, I have to call the advice line rather than FP himself, but since their service is excellent, this isn't really a big deal.) The personality conflict was the second FP was trying, but I guess this is why we hire professionals: to tell us what is best even when we don't want to hear it.

USAA Financial Planning – Part 1

This entry is only about finance and not environment.

Review is based on services received from January-July 2007.

History:
I have a good relationship with USAA through insurances and investments, and had used their free-for-members financial advising service for general stuff, but we wanted more specific advice. The glaring downside is that we don't meet in person: just phone and e-mail. The good side is that it is $200 for the planning we need at our stage of life. (They have more expensive plans for people nearing retirement and in retirement.) While we were considering paying more for someone locally (who would be available more) it was just too overwhelming to know whom to trust, and we wanted to get advice on re-routing some of our money ASAP with the new year here.

All advice we received, of course, was tailored to our situation and goals, so I don't mean to suggest that what we were told applies to anyone else in any way. Rather, I wanted to share how the procedure works (and personal examples help show that).

Getting Started:
We signed up and filled out their detailed form online where you explain your goals, concerns, a bit about yourself, as well as a very detailed form. They said would take several hours, so I felt really good when it took us less than an hour, because we already track the information they wanted to know (budget, goals, value of cars and possessions, amount in all accounts, etc.). If you have read Smart Couples Finish Rich, the info is very similar to Bach's net worth and budget forms. While I was quick to fill out the form, there were some things in our budget that didn't fit crisply in their form, so I did have to call the advice line two times.

Moving Forward:
After completing the form, we set up a phone appointment with (who we thought was) our advisor for the next week. We found out through a confirmation phone call that we were actually talking with a financial consultant, not the financial planner (FP) himself. I was pretty perturbed by this misunderstanding, because I was anxious to get started with the FP, ASAP.

In the conversation with the consultant, we cleaned up the form we had submitted and asked questions to further solve those "not-crisp" areas. We were asked to send info on all available retirement funds from our respective companies so they could match our risk preference with the options and make recommendations.

During the consultant call we also set up a "meet-and-greet" phone call time with the FP and the "big meeting". Personally, I am not big on meet-and-greets, but some people really like that extra personal touch. My husband did that one on his own and chatted with our FP for about 5 minutes when the call happened.

For the big meeting, I was disappointed that there was a month-ish wait to get an evening appointment for the big meeting (plenty of day times, though), but at least we were moving in the right direction.

Within a few days of the clean-up call, the FP and consultant prepared a preliminary 30+ page document for us based on the info we had previously provided. It addressed current finances/net worth, e-fund, SL repayment plan (our only debt), asset allocation, retirement, goals, and disability and life insurances. (We declined advising on future education, but that is included in the service.)

We were asked to review the entire document before the big meeting. I thought that the document seemed generic/formulaic mainly because the life insurance section was really outrageous considering that we don't have kids or a mortgage, and I feared that the big meeting would just be line-by-line talking about the document, which I didn't really get. (Note: at this point, this document was s only provided online, so we had to print it ourselves if for a hard copy.)

Teleconference 1:
Because of traffic and a power outage, hubby (D.) and I were both stuck on the road, in our respective cars, when the meeting time came about. I called USAA in a panic since we weren't at home to take the call and they got us set up with 3-way calling. (Actually FP asked if we wanted to reschedule, but after that month wait there was no way!)

Instead of going straight to the document, D. and I got to bring up our issues first (yay!). Our big things questions were about over-paying SL vs. investing, doing enough for retirement, saving for a house, and keeping kids on the horizon (passively). FP talked through those issues with us thoroughly before getting back to the more standard stuff in the document (by which time both D. and I had arrived at home).

Since many people sing praises about the value of maxing out their 401Ks, I was concerned about not saving enough for retirement. After a little bit of budget shifting—mostly from no longer overpaying the SL—we were able to get to 15%, pre-match. (15% is the Smart Couples % of success. FP though we were fine with 10%). Though we are still nowhere near the 401K maximum, he encouraged us to focus on our short-term goal of saving for a house rather than adding more to retirement since we are ahead for reaching the target amount he helped us come to.

(Personal Note: His point was that for our goals, we will be able to retire 18 years earlier than we are currently planning at the standard of living (SOL) we determined with him, or we can retire at age 60 with a much higher SOL we are planning for. We in no way take being on track as a license to blow money or to stop living beneath our means. Rather, we can improve our SOL now, by owning a house sooner rather than later, so that the mortgage can be paid by retirement, and thus we can be in our optimal situation in retirement.)

Knowing our estimated "target number" for retirement has been vexing me, and the FP helped me comprehend this better. Trying to figure it out on my own was frustrating and hopeless. Now, it feels great to know that we are on track for our "standard of life" goals in retirement. When we have kids we will have to readjust our monthly contributions for costs and education planning, so I am glad we are ahead for retirement at this stage in our lives.

FP prefaced many things by asking what our goals, values, and current methods are and worked the discussion around our answers. In looking for an advisor, I was concerned about being values-compatible. The FP did a great job with this; he didn't project values other than our own. He did not overly push USAA products at all. He mentioned USAA's Money Market account since we don't have one, but he encouraged us with our current banks (like ING).

Going through the document, he gave an overview of our strengths and weaknesses, and gave us some steps to take before our next meeting (sign wills, find our SS statements, etc.). He also recommended the best retirement funds for our risk profile both within USAA and elsewhere (like my 401k). At the end, the FP did a review of the action items we had come up with (we had six) and allowed more time for questions.

One of these questions was if we are on track for buying a house. I though we might get blown off, since D. was asking very specific questions, but FP had some information on the local real-estate climate here and was able to give us projections on costs, mortgage rates and the best kind for us, timeline, etc.

Next in the process, we will do our next steps, review the revised document, and set up another appointment for a month down the road.

The conversation took a little over an hour.

Within a few minutes of the call's end we received a link to a summary of the next steps. Within a few days of the call, our revised document was posted on the website. It had been updated based on our conversation. (I was happy to see that even the life insurance amount had been changed to aptly meet our lifestyle.)