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It can reduce costs assodated with student loan repayment, freeing cash for other needs.

The cost of higher education is rising much faster than disposable income. Trends in College Pridngk reports that the total annual cost of tuition and fees for the current academic year at private and public four-year institutions has risen by 9.6% and 7%, respectively, in the past year. (The figure for public institutions also includes room and board.) Combine this trend with an uncertain economy, and the result is that many students-particularly graduate students enrolled in professional curricula such as the Doctor of Physical Therapy (DPT) program-are struggling to pay off student loans.

If you are currently a student physical therapist (SPT), you should ask yourself this question to determine whether you are borrowing too much: Are you certain that the starting annual salary of your first position as a PT will be greater than the combined cost of your education loans? If your answer is "yes" and you don't have other substantial debts or financial commitments, chances are you're in good shape and will be able to manage your student loan payments without great difficulty. If your answer is "no," however, it's imperative that you familiarize yourself with debt-- management tools in order to avoid default and its unsettling consequences-which include or may include:

Being reported to national credit bureaus,

Being sued by your guarantor,

Having your wages garnished,

Losing state and federal tax refunds,

Losing employment opportunities,

Being forced to pay collection agency fees, and

Being declared ineligible for future federal aid.

This column looks at an excellent tool for making loan repayment manageable: the federal consolidation loan. This loan combines two or more federal student or parent loans that have different repayment schedules and, most often, variable interest rates into one bigger loan with a fixed interest rate. (See the list of consolidation-- eligible federal loan types in the "Eligibility" box on page 27.) It streamlines the process so that borrowers can make just one lower monthly payment to a single lender for an extended repayment term of 12 to 30 years, depending on the total loan debt. (See the repayment schedule on page 30.)

Among other advantages of federal consolidation loans: no additional fees or charges, no credit check or income verification, no annual personal income ceiling, no collateral requirement, and the availability of forbearance (temporary suspension or reduction of payments) and deferments. Federal consolidation loans give borrowers more flexibility in managing their cash by reducing the size of monthly expenditures for education debt management by as much as 50%. (The ability to lower monthly payments so significantly is a current phenomenon based on the fact that student loan rates for the 2002-2003 academic year are at historic lows.) Lower monthly loan payments means that the borrower has more capital for the other important needs in life, such as food, housing, insurance, transportation, and savings. (See the "Repayment Options" chart on page 28.)

It's important to add that this is an especially propitious time to consolidate for borrowers who have Stafford or PLUS loans. (See "Opportunity Knocks" section on page 30.)

A note: Before moving ahead with the loan consolidation process, all borrowers should thoroughly investigate their options, obligations, and repayment schedule with individuals who are experienced and knowledgeable about loan consolidation, including professional consolidation loan counselors, certified financial planners, and certified public accountant. And borrowers should not be shy about inquiring as to the credentials and experience of their consolidation consultants.

Key Considerations

Interest rates. Interest rates for federal consolidation loans are calculated by taking the weighted average of the interest rates of all of the borrower's federal education loans and rounding that figure to the nearest one-eighth of a percentage point. Because different loans have different interest rates, the consolidated interest rate will vary for each borrower. Federal loans taken out before 1998 generally carry slightly higher interest rates than those taken out in more recent years. It may turn out that you would be better off excluding one of your loans from the consolidated grouping if that loans higher interest rate would bump up the total weighted average. If you have a small balance on a loan with the higher interest rate loan, you should use the savings achieved through consolidation to prepay that loan.

It's the equivalent of paying points and a refinancing application fee when refinancing a mortgage. You pay more now (fees and points) for a time, up to the point when you hit the break-even point (the time at which the cost of refinancing is offset by savings from the lower payments), and then save money over the long term.

Borrowers should carefully consider which loans to consolidate. For example, you may be thinking about seeking your DPT. In that case, you might not want to consolidate a Perkins loan because you would then lose the federal subsidy on it. Also, make sure you know what the consolidated interest rate would be before you sign the application. And remember, because consolidation is considered a repayment option, any accrued and unpaid interest on any unsubsidized loans you are including in your new consolidation loan will likely capitalize (be added to the principal of the loan) at the time of consolidation.

Some lenders or organizations, including the Federal Direct Loan Program, may offer a reduction to the calculated weighted average interest rate for applications submitted within a designated time frame. That offer usually, if not always, comes with certain requirements that borrowers must meet. Be sure to find out what these requirements are, because your signature on the consolidation application and promissory note obligates you to the terms of the consolidation loan. Again, you don't have to consolidate all your loans, but any loans you list on the application will be consolidated.

If you have already consolidated your federal loans, you are most likely not eligible to take advantage of lower interest rates. When loans are consolidated, the loans that were merged into the consolidation disappear, and most consolidation loans carry a fixed rate of interest that does not change annually on July 1, when federal student loan interest rates are reset.

This is not to say, however, that consolidation loans cannot be reconsolidated. In order to reconsolidate, under federal rules borrowers must have at least one outstanding federal education loan to include in the new consolidation loan. This loan can be either (1) a loan issued to the borrower after the first consolidation was finalized, or (2) a loan that was made prior to finalization of the first consolidation loan that was excluded from that consolidation. This is another example of the complexity of loan consolidation, and why borrowers should seek advice from a professional consolidation specialist.

Repayment term Federal consolidation loans traditionally reduce the size of monthly loan payments by extending the repayment term beyond the standard 10 years. Although extending the term means the total amount of interest paid by the borrower generally increases, borrowers can offset the impact of the increased interest expense by making larger payments (as their income increases and/or other expenses decrease) and applying the extra amount as an early payment on principal. With consolidation, there is no penalty for pre-payment.

Processing period You usually can expect the entire loan consolidation process to take from 4 to 8 weeks, depending on the number of holders the consolidating lender must contact to obtain payoff balance information on the underlying loans you are consolidating. In the 20012002 academic year, borrowers consolidated more than $17 billion in loans-twice as much as the year before. In the current academic year, with interest rates dropping to a historic low, a record number of borrowers are expected to refinance. With an increased number of borrowers consolidating, processing can now take up to twice the normal time of 4 to 8 weeks.