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Low Interest Rates Make it the Best Time to Cosolidate Loans

published May 23, 2005

( 6 votes, average: 4.3 out of 5)
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<<"Now is the best time on record to consolidate," said Rob Drybread, Financial Aid Counselor at the University of Colorado School of Law. "The rates are at their lowest ever, and with a significant increase expected July 1, we are suggesting people consolidate as soon as possible."

Interest rates on federal student loans today are the lowest in the student loan program's 40-year history and are projected to increase at least 2% in July.

"This is the best and last time to consolidate at the low interest rates we have seen for the last few years," said Michael B. Machen, Director of Financial Aid at the University of Chicago Law School. "On July 1, rates are going to almost double, from 2.77% to over 5%, and it is unclear whether fixed-rate consolidation will even exist next year. So the next [several weeks] are truly the end of an era as far as loan consolidation goes."

Borrowers can switch to a fixed rate by consolidating loans. The interest rate on a consolidation loan is determined by the weighted average of the interest rates on all of the loans being consolidated, rounded up to the nearest one-eighth percent.

Graduating law students and former law students can lower their monthly debt payments by consolidating federal student loans into a single fixed-rate loan with an extended repayment period. Drybread said that applications processed by June 30 will be locked in at the 2.875% rate for the life of the loan. But time is running out.

"I'm telling law students to still get applications in as soon as possible due to the 30- to 45-day processing time on an application—would hate for there to be issues with interest rates due to a processing delay," said Drybread.

Machen said that after June 30, students can still consolidate. However, it will be under next year's rates—which will be based on the 91-day Treasury Bill and are projected to be much higher, possibly more than 5%. He said once a student has consolidated, his/her loans are fixed at that rate for the life of the new loan, which can be up to 30 years. He said with additional incentives provided by the lender, the rate can be as low as 1.5%.

"I am begging my students to make sure and do this before June 30 because it is such a good deal," said Machen.

Erin Korsvall, a spokesperson for loan provider giant Sallie Mae, said that federally guaranteed, variable-rate education loans, like Stafford and PLUS Loans, have interest rates that are readjusted every year on July 1. These are rates that are set by federal statute and are based on the 91-day T-Bill from the last auction held in the month of May. "Last year's auction, held on May 24, 2004, resulted in a T-Bill yield of 1.07%," explained Korsvall.

While the rush to consolidate now is primarily motivated by the anticipated increase in interest rates that will be effective July 1, there are also other motivations. The Bush administration has proposed changes to the federal program, such as shifting consolidation loans to a variable interest rate, which could ultimately cost borrowers more if rates rise.

"It's hard to imagine a scenario where consolidation would not be beneficial for this spring's law school graduates or those who are repaying law school loans," said Korsvall.

Loans that can be consolidated into a Federal Consolidation Loan include Federal and Direct Stafford Loans, both subsidized and unsubsidized; Federal and Direct PLUS Loans; Federal and Direct Consolidation Loans; Federal Perkins Loans; Federal SLS Loans; and nursing and other health education loans, including HEAL Loans. By consolidating, students can lock in a fixed interest rate for the entire repayment period and combine multiple loan balances under a single lender, making only one payment.

"Students who are still enrolled in school may request that their loans enter repayment early, thereby making them eligible for student loan consolidation," said Korsvall.

Normally, students would have to wait until they graduate to do this because borrowers must begin repaying their student loans or be in a six-month grace period following graduation in order to become eligible for consolidation.

However, many in the student aid world felt that the option to consolidate while in school was possible under the existing law and urged students to consolidate. The Education Department announced recently it has given the green light for students to consolidate while in school, which can save students thousands of dollars.

"This is legal. The Department of Education recently clarified the early repayment option available to borrowers under Section 428(b)(7) of the Higher Education Act of 1965, as amended," said Kristen Boyer, spokesperson for TG, a public, nonprofit corporation that administers the Federal Family Education Loan Program (FFELP). "According to the Department of Education, a Stafford Loan borrower may request the lender of his or her loan to put the loan into repayment status, allowing the borrower to consolidate, even if the student is still enrolled and plans to remain enrolled. However, when the loan moves directly into repayment status, the borrower loses the benefit of a grace period, now and in the future."

Machen said that by consolidating, a borrower can get the same benefits as a student consolidating, but will receive a slightly higher rate because he/she did not consolidate while still in school or during the grace period.

"People who consolidate in school or during the grace period get the lowest rates," said Machen. "Students can save tens of thousands of dollars over the life of the loan by consolidating now. If a student has 60,000 in debt, paying 2.77% instead of 5% saves them over $25,000 over the life of the loan."

Interest rates are lower when students are in school, in their grace period (the six months after they leave school before they have to start paying loans), or in periods of deferment. Interest rates are higher when they are in repayment. By consolidating while in school, in their grace period, or when they are in a deferment, they may save up to 0.6% on their interest rate, according to TG.

TG recommends that students contact the lender(s) or servicer(s) that hold their loans to discuss consolidation. If all their loans are with one lender, they are required to consolidate with that lender, unless the lender does not make Consolidation loans or does not offer an income-sensitive repayment schedule. If a student has his/her student loans with multiple lenders, he/she can consolidate with any lender that participates in the program.

Pros and Cons for Consolidating Now*:

Pro: Locking in the lowest rates in the history of the student loan program (provided you consolidate prior to June 30)

Pro: Lower monthly payments; extended repayment period of up to 30 years, depending on your loan balance

Pro: Making a single payment each month, as opposed to multiple payments to multiple lenders

Con: Longer repayment period means more interest paid over the life of the loan

Con: If you're consolidating while in school or in grace, you'll give up the grace period and enter repayment immediately

Con: You may lose some options for loan forgiveness (depending on which types of loans you include in the consolidation)

For more information visit:
TG's "Consolidation Station":

( 6 votes, average: 4.3 out of 5)
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