Locking rates on student loans urged
April 24, 2006 - Posted in Education NewsA year ago, students and parents who borrowed to cover college costs rushed to lock in the lowest interest rates in four decades.
Now those who haven’t consolidated their loans under the federal student-loan program are being urged to do so before July 1.
The reason: The deficit-reduction bill that President Bush signed earlier this year cuts $12.7 billion from the loan program by slashing subsidies to lenders and changing rules for borrowers, including higher fixed-interest rates.
Act by June 30 and the current rules apply so the Class of 2006, other students still in school and parents can consolidate loans and lock in interest rates as low as 4.7 percent.
“For students, graduates and parents who want to secure major savings, procrastination is just not an option — it’s time to act now,” said Mark Brenner, vice chairman and executive officer of College Loan Corp., a major student lender based in San Diego.
His firm figures that the average borrower stands to save nearly $3,000 by consolidating before the July 1 rate increases.
However, Patricia Scherschel, vice president of loan consolidation for No.1 student-loan lender Sallie Mae in Reston, Va., counsels to check your options with your school’s financial aid office and dig deeply into lender-benefit promises for burdensome fine print. “Consolidation is an important financial option,” she said, “but you want to make the right decision.”
As of July 1, these changes are in store:
nStafford loans. Students who borrow money through the Stafford loan program will pay a fixed 6.8 percent rate during the life of the loan, a change projected to add up to $2,000 to the cost of repaying the typical $20,000 Stafford loan.
Outstanding Stafford loans will carry a variable interest rate that’s adjusted every July 1, based on the late-May auction of three-month Treasury bills.
Fluctuating rates have let students and graduates have the lowest interest rates in 40 years lately.
But with rates rising, the cost of outstanding variable-rate Stafford loans likely will approach the new 6.8 percent fixed rate with further adjustments every July 1 thereafter until all Stafford loans carry fixed interest rates.
Before July 1, 2006, those variable rates also let those who want to consolidate borrowings into a single loan lock in those interest rates, pegged at 4.7 percent last July 1 but up from 2.77 percent the previous 12 months.
Starting July 1, 2006, only borrowers out of school can consolidate loans.
nPLUS loans. These Parent Loans for Undergraduate Students — or PLUS loans — let parents borrow money to cover college costs not covered by other aid sources. Rates on current loans, also adjusted yearly, are now 6.1 percent and will be readjusted July 1, based on the May Treasuries auction. Current PLUS loans also can be consolidated at today’s rate through June 30.
PLUS loans made after June 30, 2006, however, will carry a fixed interest rate of 8.5 percent for the life of the loan.
A second change will let graduate students take out fixed-rate PLUS loans, which might offer a more favorable rate than they’d get from commercial lenders. Parents may get better rates from private lenders.
Footnote: Congressional Democrats, pledging to campaign on the issue for the November elections, propose legislation to cut the new student-loan interest rates by half.
The constitutionality of the deficit-reduction law — which makes the changes in the student-loan program — is under court challenge because the House and Senate didn’t clear the same bill for President Bush’s signature.
But don’t expect the new deadlines to change, because fast action isn’t expected on either front.
For families of high-school seniors, the good news is that most everyone got admitted to college this month despite record numbers of applications.
The bad news is: Now families have to pay for it.
When the College Board reports that an education at a four-year public college averages $12,127 for the 2005-06 school year, with tuition, room and board at private schools topping $29,000, most families are looking at student loans and other kinds of financial aid. Mark Kantrowitz, publisher of FinAid.com in Pittsburgh, estimates that two-thirds have student loans at the least, with grants, scholarships, work-study and other aid in addition.
To request aid, fill out a Free Application for Federal Student Aid online at www.fafsa.ed.gov, a U.S. Department of Education Web site.
FAFSA’s federal deadlines are June 30, 2006, for 2005-06 applications and July 2, 2007, for the 2006-07 academic year, although many colleges and state programs have earlier deadlines and may award help on a first-come basis. Families who applied already, based on final 2005 paycheck stubs, may need to revise their application based on their 2005 income taxes, due next week.
FAFSA is the gateway to qualifying for federal Pell grants up to $4,050 a year for low-income students, state assistance and merit-based aid from colleges and universities. The FAFSA form also must be filled out for the federal student-loan program, even though the loans aren’t based on financial need.
Shop around
Impending changes in student-loan programs make it imperative to comparison shop before deciding who offers the best deal and whether to consolidate.
“Do your homework before you sign on the dotted line,” Sallie Mae’s Scherschel said.
Some lenders have eliminated up-front Stafford loan fees for the 2006-07 school year, including the 1 percent federal default fee and the 2 percent loan-origination fee.
Lenders also may provide back-end rate reductions for borrowers who enroll in automatic repayment plans, plus a discount once they establish a record of making on-time payments.
Source: dailyrecord.com