Interest rates on student loans are set to rise again in July by almost two points, making this month an important time for borrowers to consolidate and save money.

Student loan interest rates will climb 1.84 percentage points July 1, one of the largest increases in the history of the program, according to Pat Scherschel, vice president of loan consolidation for Sallie Mae, the largest student lender.

But students, graduates and parents who consolidate this month can avoid the increase and get their new loan at a fixed rate.

“Hundreds of thousands of our borrowers consolidated last year ahead of the rate increase,” Scherschel said. “We anticipate another surge in consolidation this month.”

Consolidating student loans is relatively easy. By law, there are no upfront charges or fees, and the loan application, available on most student lenders’ Web sites, can be completed in 10 to 15 minutes.

While most borrowers have consolidated, there are still thousands who have not. About 62 percent of Sallie Mae’s $127 billion portfolio of student loans has been through the consolidation process, Scherschel said.

There are many advantages to consolidation. Most important, the interest rate becomes fixed for the life of the loan, replacing the pre-consolidation variable rate.

This results in an overall savings over the life of the loan.

By consolidating, a borrower still in school or in the six-month grace period afterward could lock in an interest rate as low as 4.75 percent for the rest of the loan’s term. A borrower who doesn’t consolidate would pay 6.625 percent on a variable-rate loan after July 1.

Savings are also possible for graduates who have never consolidated their loans.

Sallie Mae gives this example in a news release: A borrower with a $20,000 balance who consolidates before July 1 at a 4.75 percent interest rate will have a monthly payment of $129. But if the borrower waits until after July 1 to consolidate, his or her interest rate will be 6.625 percent, with a monthly payment of $151. Over the life of the loan, the borrower would pay $5,123 more in interest.

For parents who took out loans for their children through the Parent Loans for Undergraduate Students (PLUS) program, a consolidated rate will go from 6.125 percent to 8 percent in July.

Interest rates on student loans are set each July 1 for the coming year based on the Treasury bill yield from the last auction in May plus a margin of interest set by Congress.

Borrowers are allowed to consolidate their loans once in the life of the loan and can consolidate to a fixed rate even if they just have just one loan. If they left out a loan or added loans after their consolidation, they are allowed to reconsolidate, however, Scherschel said.

Consolidation allows for a single monthly payment from one loan and can extend the repayment term up to 30 years. There are no credit checks or prepayment penalties when a borrower consolidates.

Borrowers should contact their lender and see what consolidation benefits they offer. Even though the interest rates are set by the government, lenders can slice off part of the rate as incentives for options such as automatic debiting and on-time paying. For example, Sallie Mae offers a quarter percentage point off the interest rate for electronic payment and another 1-point reduction in interest after on-time payments for 36 months. The resulting 1.25-point reduction can save a borrower with $20,000 in student loans $3,400 in interest.

If you’re not sure what student loans you have, a no-cost loan locator service is available at the National Student Clearinghouse at www.nslc.org or by calling 703-742-7791.

To see how much you would save by consolidating your loans, go to a loan consolidation calculator by FinAid at www.finaid.org/calculators/loanconsolidation.phtml.

IN THE KNOW

Gaining interest

Here are the new interest rates for student loans issued on or after July 1, 1998, effective July 1:

Stafford loans (in-school, grace and deferment periods): 6.54 percent from 4.7 percent

Stafford loans in repayment: 7.14 percent from 5.3 percent

PLUS (Parent Loans for Undergraduate Students) loans: 7.94 percent from 6.1 percent.

Note: The interest rates on consolidated loans are rounded up to the next eighth of a percentage point.

SOURCE: Sallie Mae

This entry was posted by Taman Siswa on Tuesday, June 6, 2006 at 4:59 pm and is filed under College Loans, Student Loan. Tags: Congress, Loans, Pat Scherschel, Sallie Mae, Student, student lender, Student Loan, . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.