Consolidation can save on your student loan
May 30, 2006 - Posted in Education News, Student LoanGot a pile of student loans to pay off?
Borrowers with the common Stafford and Plus student loans are likely to see their interest rates jump by about 2 percentage points at the end of May, adding thousands to the cost of repaying a typical loan.
So put July 1 on your calendar. That’s the deadline for taking out a new Federal Consolidation Loan to refinance that older, variable-rate debt with a new fixed-rate loan currently charging as little as 4.5 percent. This rate, too, is likely to rise on July 1.
One of the most common student loans, the Stafford Loan, carries a variable rate that adjusts every July 1 by adding 2.3 percentage points to the yield on three-month Treasury bills. For the past year, these loans have charged 5.3 percent.
Because the Federal Reserve has pushed short-term interest rates up during the past year, Staffords are expected to charge around 7.3 percent for the 12 months beginning July 1.
Another common loan, the Parent Loan for Undergraduate Students, or PLUS, also carries a variable rate that adjusts every July 1. It currently charges 6.1 percent and is also expected to rise by about 2 points.
Both types of loans, and many others, can be replaced with a single fixed-rate Federal Consolidation Loan. Rates on these vary, depending on the loan or loans being replaced, but for many the charge is only 4.5 percent. The consolidation process is similar to refinancing a home mortgage - using a new loan to pay off older ones with less desirable terms.
The College Loan Corporation, one of many companies that helps borrowers refinance, estimates the typical borrower with $20,000 in outstanding student loans can save $3,000 or more by consolidating before July 1.
Just about any federally backed student loan qualifies for consolidation, but it cannot be used for private loans, such as those from banks, credit unions, savings and loans, parents or other people.
Generally, it’s a good idea to refinance when you can get a lower rate. But be sure to take a long-term view.
For example, you may be able to cut your monthly payments in half with a new loan that gives you longer to repay the debt. But you could end up paying more interest in the long run if, for example, you take 20 years to pay off the new loan instead of the five years left on the old one.
If you have some spare cash, think about simply paying off all or part of your student loans.
In past years, this often didn’t make sense, since many student loans carried rock-bottom interest rates. A year ago, for example, consolidation loans were charging a mere 2.875 percent. That was so low it made sense to consolidate and try to invest spare cash elsewhere for a higher return.
But with the consolidation rate at 4.5 percent it may make sense to pay loans down. Any money spent to reduce debt would in effect be earning 4.5 percent, which competes with what you could earn in a safe investment such as a certificate of deposit at a bank.
If you do take out a consolidation loan, sign up to have your monthly payments automatically withdrawn from a bank account. Otherwise, the minimum rate will be 0.25 percent higher, or 4.75 percent.
Payments can be set up in several ways. Most borrowers choose the standard repayment option, which has fixed monthly payments for the life of the loan.
There also are several graduated-payment options that permit low payments during the first few years, with higher ones later. An extended payment option can reduce monthly payments by extending the loan term as long as 25 years.
There’s even an option that bases payments on your income.
And I’ve just scratched the surface - this is a complicated issue.
So don’t waste time. July 1 is not that far off. I’d start with a couple of Web sites: www.salliemae.com, and www.collegeloan.com. But don’t stop there; many lenders handle consolidation loans. Just type “federal consolidation loan” in your search engine.
Source: sunherald.com