Student loan loophole about to close
May 15, 2006 - Posted in Student LoanA year ago, hundreds of thousands of students rushed to take advantage of a loophole allowing them to consolidate their student loans before they graduated and lock in the lowest interest rates in the history of the Federal Family Education Loan Program.
Now the loophole is closing, and while rates have moved higher, students and parents who still have Stafford Loans or Parent Loans for Undergraduate Students left to consolidate should do it before rates go up again and program changes kick in.
On July 1, rates on Stafford loans are expected to rise by as much as 2 percentage points up from 4.7 percent. The rate parents pay on PLUS loans, now at 6.1 percent, is also expected to rise by as much as 2 percentage points.
“This is the last hurrah for in-school borrowers,” said Eric Solomon, spokesman for Nelnet, a student loan industry leader. He said students who miss the deadline will have to wait until they graduate or drop to less than half-time enrollment to consolidate, exposing them to the risk that rates will continue to rise.
Rates on Stafford loans currently in repayment are also set to rise by as much as 2 percentage points, so graduates who haven’t already consolidated their loans should also lock in the current rate of 5.3 percent.
While it may be tempting to wait until final exams are over, students who procrastinate could end up paying the higher rate while they wait for their applications to be processed. That’s what happened last year, when the volume of student and graduate loans being consolidated jumped by more than 50 percent to $54 billion, creating a logjam as lenders sorted through the paperwork. Lenders say application volumes are running just as high or even higher so far this year, and while many have added staff to handle the workload, there could still be delays.
“It’s generally best to consolidate your loans at least a month before the deadline, in order to give the lenders time to process the paperwork,” said Mark Kantrowitz, publisher of FinAid, an online provider of financial aid information.
Loan consolidation combines several student or parent loans into one bigger loan from a single lender, which is then used to pay off the balances on the other loans. It can save borrowers thousands of dollars over the life of the loan by converting the variable interest rates on their outstanding loans to a single, fixed rate, foregoing any future rate increases.
The fixed rate on the new loan is calculated as the weighted average of the variable rates of the loans being consolidated, adjusted up the nearest one-eighth of a percentage point, and capped at 8.25 percent.
However, some lenders are offering discounts as an incentive to keep existing borrowers from consolidating their loans elsewhere, offering the potential for even bigger savings. Student loan giant SLM, also known as Sallie Mae, is offering borrowers with a balance of at least $10,000 a rate discount of 1 percentage point on consolidated loans if they make their first 36 payments on time.
In addition, borrowers with a minimum balance of $7,500 are eligible for an immediate discount of 0.25 percentage point on their consolidated loans if they sign up to pay via direct debit.
Nelnet also offers eligible borrowers a 1 percentage point interest rate reduction on consolidated loans after 36 payments and an additional 0.25 percentage point reduction for automatic debit payments.
Consolidation also offers borrowers the chance to lower their monthly payments by spreading them out over a longer period of time — as long as 30 years, depending on the balance of the loan, compared with the standard 10-year repayment term on unconsolidated loans.