Save cash :Time running out to consolidate student loans

Kathleen Pender
Tuesday, June 13, 2006
San Francisco Chronicle

The days of cheap college loans are numbered. Including today, the number is 18.

Starting July 1, the rate on government-guaranteed loans will jump significantly. The new rates apply to Stafford loans, taken out by students, and to Parent Loans for Undergraduate Students, also known as Plus loans.

If you or your child has one or more Stafford or Plus loans that have not been consolidated, you can lock in today's lower rates by converting them to a fixed-rate consolidation loan by June 30.

Also on July 1, the rate on all newly disbursed Stafford and Plus loans will have interest rates that are fixed for the life of the loan. These rates also will be significantly higher than existing rates. If you or your child needs to borrow for the 2006-07 school year or beyond, there is no way to avoid the higher rate on new loans.

Here's the lowdown on how the changes will affect new and existing loans.

Existing loans

Since the late 1990s, Stafford and Plus loans have had variable rates that change once a year, on July 1. The rates are pegged to the three-month Treasury bill yield in late May, which has risen almost 2 percentage points in the past year.

On July 1, the rate for Stafford loans for students who are in school, grace or deferment will rise to from 4.7 percent to 6.54 percent.

The rate for Stafford loans in repayment will go to 7.14 percent from 5.3 percent.

The rate for Plus loans will rise to 7.94 percent from 6.1 percent.

Borrowers can avoid the increase by consolidating one or more of these variable rates loans into a fixed-rate loan before July 1.

The rate on the new consolidation loan will be a weighted average of the rate on the loan or loans being consolidated, rounded up to the nearest one-eighth of a percentage point.

Consolidating is especially important for continuing students. After June 30, students can no longer consolidate Stafford loans while they are still in school.

Consolidating now is even more important for students who are graduating (or leaving school for other reasons) this summer.

Suppose you graduate in June and have one Stafford loan that has not been consolidated. Your rate on this loan is 4.7 percent. If you consolidate by June 30, the rate will be fixed at 4.75 percent for the life of the loan. (That's 4.7 percent rounded up to the nearest eighth.)

Now suppose you are job-hunting or traveling and forget to consolidate until September. You will still be in the six-month grace period students get after leaving school before they enter repayment. But you will have missed the June 30 deadline, so the rate on your consolidation loan will be 6.54 percent rounded up to the nearest eighth, or 6.625 percent.

Now suppose you are really distracted and forget to consolidate until February. You will no longer be in the grace period and will have missed the June 30 deadline, so your rate will be 7.14 percent rounded up to the nearest eighth, or 7.25 percent.

Most advisers are urging borrowers who can consolidate to do so by June 30. The biggest risk of consolidating is that short-term interest rates drop below where they were a year ago -- an unlikely but not impossible scenario.

If that happened, you would have been better off with a variable-rate than a fixed-rate loan. Unlike home mortgages, college loans cannot be refinanced to take advantage of falling rates.

If you have a Stafford or Plus loan, you probably have been inundated with consolidation offers.

If all of your loans are with one private-sector lender, you must give that lender the first chance to consolidate your loans. Most lenders will usually take it.

This so-called single-holder rule applies only to Stafford and Plus loans issued through banks and other private-sector lenders. It does not apply to loans made directly by the federal government under the direct-loan program.

A bill in Congress would repeal the single-lender rule, perhaps this week. If that happens, all borrowers will be able to shop around for a consolidation loan.

In some cases, it could pay to shop.

Although the government sets the maximum rate on Stafford and Plus loans, lenders can charge less. Many offer discounts for setting up automatic payment plans or making a certain number of on-time payments.

If you are disciplined, these discounts can be a good deal, but beware: You could lose the on-time discount if you make a single payment one day late. When you are just out of college and moving around frequently, it's easy to be late once or twice.

There is no fee to consolidate Stafford or Plus loans, so don't be lured by "no-fee" deals.

"Be cautious about direct mail pieces that overly hype how much you can save," says Jim Boyle, president of College Parents of America.

Nancy Coolidge, coordinator of student financial support at the University of California system, says she tells most students who are consolidating to "go back to the people who loaned you the money. It may not be as cheap, but it's quicker. If shopping around causes you to miss the (June 30) deadline, it's a big loss."

Consolidating can backfire if you choose such a long repayment term that you end up paying more in interest, even with a lower rate.

The standard repayment period for Stafford and Plus loans is 10 years, but some consolidation loans can be repaid over as many as 30 years.

If you are afraid your initial salary won't cover your payments, you might consider a graduating repayment option, where "you start off with lower payments and your payment increases over time," says Boyle. "You are placing a bet that your income will rise, so your student loan repayment isn't as painful."

Boyle says he would be wary of "income-contingent" repayment plans, which some lenders offer. They sound good, but you could end up paying interest only, with the unpaid principal being added to your balance.

New loans

After July 1, the rate on all new Stafford loans will be fixed at 6.8 percent for the life of the loan. The rate is the same for students in and out of school.

All new Plus loans will be fixed at 8.5 percent if they come through private-sector lenders or 7.9 percent if they come through the government's direct-loan program. (Schools decide which program they will offer students.)

Apparently, Congress wanted both rates set at 8.5 percent but made a mistake, which could be fixed before July 1.

Although the new fixed rates seem high today, they could look reasonable or even cheap if interest rates continue to climb. And they do have one big advantage over the old variable rates: They're much easier to explain. Let's hope Congress keeps it simple.

https://www.thestudentbox.com/time-running-out-to-consolidate-student-loans-save-cash.php