Amid the hype, opportunity lurks for students with loans

If you’ve got a student loan, then you’ve probably got mail.

“Consolidate by April to cut your payments by 70 percent!” “Get the lowest interest rate by consolidating your loan with us!” “No credit check and no application fee!”

As interest rates plunge to historic lows, it seems that everyone – credible banks and slippery lenders alike – wants a piece of the federal student loan consolidation business.

“It’s like ‘buy one CD, get one free,’” says Harvard Business School (HBS) student Dan Thibeault. “It’s created a stigma in the industry.”

“There’s a lot of confusion out there,” adds Patty White, director of financial aid at the Graduate School of Education (GSE).

Around the University, financial aid officers and even some student entrepreneurs are shouting to be heard above the din of direct mail: Ignore the hype, but don’t pass on student loan consolidation altogether. For most students, consolidating at today’s low interest rates could save them a bundle on future student loan repayments while fixing the rate of their loan. And with Harvard’s participation in the Federal Direct Lending Program, students can consolidate while they’re still in school, taking advantage of interest rates that many predict will only climb from their current low.

Even graduates, such as some Harvard staff, who are still paying student loans may benefit if they have not yet consolidated.

Created in 1986, the Federal Loan Consolidation Program lets students consolidate their various federal loans and extend their payment period from the traditional 10 years to up to 30 years, thus lowering monthly payments (although increasing the total amount paid over the life of the loan). Yet, contrary to traditional lending, in which interest rates rise with the length of the term of the loan, the government program offers comparably lower interest rates to students who enroll – and fixes the rate for the life of the loan. Currently, students can lock in interest rates as low as 2.875 percent, far lower than the rates in effect when they initially borrowed the money. However, this rate is likely to be reset, as it is each year, in July, when federal student loan rates are updated to reflect current market conditions.

And because Harvard is one of about 1,100 schools nationwide that participates in the Federal Direct Lending Program, in which federal capital is loaned to students through the University rather than private capital from a third-party bank, students at the College and any of the graduate schools can access consolidation loans before graduation, while they are still in school.

Direct lending

Consolidating directly with the federal government through the Direct Lending Program, which eliminates banks and their profit motives from the process, offers additional advantages, particularly to students who hope to pursue lower paying nonprofit or public service careers. While both the government’s Direct Consolidation Loan and the Federal Family Education Loan (FFEL) – paid to individual lenders – offer graduated repayment schedules, Direct Consolidation Loans also have an Income Contingent Repayment Plan, which allows borrowers to pay an affordable portion of their income and forgives loan balances after 25 years.

“We’re encouraging our students to consolidate in the Direct Loan Program very heavily,” says Mohan Boodram, director of admissions and financial aid at the Harvard Medical School. There, student loans are serious business: The average debt of the class of 2003 was $91,000, approximately half of it federal loans. “There really is no downside to doing an in-school consolidation when interest rates are as low as they are today.”

“There are some things the Direct Loan Program offers that the other programs don’t offer,” adds Susan Gilbert, associate director of MBA financial aid at Harvard Business School. “We help our students understand what’s the best option for them.”

At the GSE, where last year’s graduating doctoral students carried an average debt of $55,000, White notes an irony in all the loan consolidation information flooding students.

“They’re getting a slew of marketing materials from all different lenders, when the one lender that they may most benefit from, the Department of Education, can’t market to them at all,” she says.

White encourages her students to learn as much as they can about loan repayment and pursue the plan that best suits their individual situation: often Direct Consolidation Loans, but sometimes, no consolidation at all. “The trick about consolidation is it’s not one-size-fits-all,” she says.

Financial aid professionals stress that students should consider the impact of consolidation on some of the benefits of their original loan, such as a postgraduation grace period on payments or special loan forgiveness circumstances, that may not transfer to a consolidation loan.

An entrepreneurial model

At Harvard Business School, Dan Thibeault and five classmates have launched Graduate Leverage, a grassroots business that aims to educate their fellow students at Harvard and elsewhere about the puzzling intricacies of student loan consolidation. With a Web site and a toll-free phone number, they dispense what they believe is valuable information to students and graduates with debt. And, by partnering with selected educational lenders, Graduate Leverage can also consolidate loans; like all loan consolidation, there is no cost to the customer.

The entrepreneurs – Mark Palmenter ’00, Andrew Rodriguez, Andrew Solomon, Oladipo Taiwo, Thibeault, and Jeff Wanic, all second-year MBA students – believe their status as fellow students and fellow debtors gives them a rare commodity in their industry: trust. They insist they’re focusing on educating fellow students about loans rather than on a quick grab of the fees associated with consolidation.

Graduate Leverage had its beginnings in the partners’ realization that their fellow HBS students, for all their business savvy, didn’t understand student loan consolidation. When debt management came up in a class, Thibeault offered to give a presentation to his section on loan consolidation. The students wanted more.

“We haphazardly put up a Web site with ‘student loan consolidation 101’,” says Thibeault. When calls started coming in from students at business schools and universities nationwide, the team launched Graduate Leverage as a class project. This spring, they’re getting credit for two of their five classes for running the business, which the founders call an unparalleled educational experience.

Although their business aims to make a profit – the five partners invested $65,000 of their own money in the venture – Graduate Leverage’s educational mission also taps the founders’ social conscience to make a difference. As the founders fan out through the region this spring to take their message to college and graduate students at other institutions, they’ve created partnerships with two organizations – Idealist and Net Impact – that target people interested in nonprofit and socially responsible careers. They’re also committed to visiting 15 historically black colleges,

even though the relatively small numbers at those colleges may not yield many customers.

Learn now, pay less later

Financial aid officers around the University agree with the HBS students that educating students about opportunities for consolidating their loans at favorable rates is important. “If they can help educate, great,” says HBS’s Gilbert of Graduate Leverage. “They may reach students that we’re not reaching.” She adds that it’s crucial for students to do their own research to understand which loan consolidation plan best suits their circumstances.

Students “need to know that there are some options for repayment, and if they plan carefully as they go along, they can keep their options open when they graduate,” says Harvard College financial aid office director Sally Donahue, adding that shrewd financial decisions during college that reduce debt burden can give students the freedom to pursue their dream careers with less concern about the size of their paychecks. Her office hosts “Financial Aid 101,” a session for freshmen; it was created in response to graduating seniors who wished they’d had a head start on understanding their loans.

Donahue notes, however, that students in the College have uniquely low levels of debt, thanks to a commitment by the Faculty of Arts and Sciences to increase outright aid to College students. Average debt for the Class of 2003 was just $8,830, almost half of the average for the Class of 2000 and far below the national average of $17,000.

The graduate schools, whose students often arrive already burdened by debt from their undergraduate studies, are similarly proactive in helping students negotiate loan repayment, sending reminder e-mails, hosting information sessions with guest speakers, and holding workshops.

“In the coming weeks, we plan once again to do a major marketing effort to make sure students understand they have a unique opportunity here,” says HMS’s Boodram. “We are very pleased with the student response. Our students are definitely interested in taking advantage of low rates.” HBS will host a speaker from the Department of Education this spring to help students understand the consolidation, particularly through the Direct Loan Program.

Like the College, the GSE front-loads students with information at the beginning of their school careers. Acknowledging that it can be overwhelming to think about paying off loans before classes even start, White says, “I tell them, if there’s one thing you remember from this session, it’s think about consolidating in February or March.”