It's a good time to consolidate students loans, avoid rate rise
# Eileen Ambrose -- Personal Finance
ALL GOOD things come to an end, and that may be true in July when historically low interest rates on student loans are readjusted.
If current trends continue, the new rates on federal student loans could go up nearly 2 percentage points, some lenders say. It would be the first increase in five years.
For college seniors on the verge of graduating or borrowers repaying federal loans, there may be no better time to consolidate education debt. Doing so by June 30 can lock in today's low rates for the life of the loan.
"It may not be the last great year, but it may be the greatest year of all time" to consolidate, said Mark Brenner, president of College Loan Corp., a student loan provider in San Diego.
Each July, the variable rates on federal student loans are adjusted, based on the three-month Treasury bill auction at the end of May. Rates today are the lowest in the student loan program's 40-year history.
Borrowers, however, can switch to fixed rate by consolidating loans.
Because of the formula used in consolidation, the fixed rate can differ among borrowers and will be slightly higher than the variable rate. Essentially, the formula uses a weighted average of a borrower's existing loan rates and rounds it up to the nearest one-eighth of 1 percent.
By consolidating now, borrowers repaying newer loans could secure a fixed rate of 3.375 percent. New graduates could receive a fixed rate of 2.875 percent by consolidating during the grace period, the six-months between graduation and when repayment kicks in.
Depending on the amount of debt, a borrower can extend the life of the loan from 10 years to as much as 30 years.
Consolidation is not just for students, either. Parents with a Parent Loan for Undergraduate Students (PLUS) can also consolidate debt, although at a higher rate than that of students.
Low interest rates aren't the only reason to consider consolidating. Legislation pending in Congress would require that future consolidation loans be at a variable rate, a move that would save the government money but cost borrowers more if rates rose.
With graduation ceremonies on the horizon, many college seniors aren't thinking about loans, Brenner said. "If they want to save a lot of money, they really need to focus on it," he said.
Take a soon-to-be graduate with $20,500 in loans, the average amount of debt consolidated last year, according to College Loan Corp. Assuming the rate on loans will go up 2 percentage points in July and stay at that level for 10 years, a new graduate would save about $2,930 by consolidating during the grace period. Those in repayment would save about $2,360 by consolidating before July.
Pegah Bozorgnia, a senior at Hood College in Frederick, is thinking of her $32,000 in loans. "It's hard to pay it back. What I'm going to do is try to pay it off as soon as I can to avoid all the interest," the 27-year-old said.
She plans to consolidate her loans after graduation this month, and is glad she can take advantage of the low rates. "I'm happy with it, but I wish I didn't have a lot of loans," the management major said.
If all of your loans come from one source, you must first seek consolidation from that lender. If you borrowed from multiple lenders, you're free to look around. Plenty of lenders are competing for consolidation business, and many offer discounts and perks to attract customers.
Lenders often will reduce the interest rate by a quarter-point if borrowers repay through automatic withdrawals from a bank account. Frequently, too, lenders will reduce the interest rate by 1 percentage point after borrowers make 36 or 48 months of on-time payments.
Make the first nine months of payments on time and College Loan will send you a cash rebate equal to 1 percent of the remaining principal, not to exceed $1,000.
New graduates often lose their grace period by consolidating during those six months. But loan providers Sallie Mae and Collegiate Funding Services, both based in Virginia, will hold a consolidation application until the end of the grace period. That way, new graduates will enjoy payment-free months yet lock in the lower grace-period rate. The lenders still must receive the consolidation application by June 30.
Make sure you dig into the details of the deals if you're shopping around.
"Find out what benefits are offered. Find out what consumer services are available," said Martha Holler, a Sallie Mae spokeswoman. "What happens if I go back to school or if I miss a payment or pay late?"
For example, you can lose your discount for on-time payments by being tardy. Sallie Mae gives 14 days past the deadline before declaring a payment late, and other lenders are more stringent, Holler said.
Consolidating isn't for everyone.
If you're nearly finished repaying your student loans, it might not be worth the trouble to consolidate. And some lenders won't consolidate small balances.
Or you could lose some discounts or other benefits by consolidating. With a federal Perkins loan, for example, a borrower would forfeit a perk that forgives debt for those entering certain professions.
By extending the life of the loan, you could end up paying more in interest than if you had paid off the loan earlier at a higher rate, said Bob Murray, spokesman with USA Funds, a student loan guarantor in Indiana.
Also, once you consolidate federal loans, you can't do so again unless you go back to school and take out more loans.
To suggest a topic, contact Eileen Ambrose at 410-332-6984 or by e-mail at eileen.ambrose@baltsun.com.
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