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 The
July 1 deadline is fast approaching for college graduates to consolidate
their student loans -- and they'd better not wait until the last
minute and pull an all-nighter to complete this assignment.
It's always better to borrow money when it's cheap
and you can lock in the rate. Even though the Fed has been on a
tightening roll, bumping up the fed funds rate at each of the past
eight Federal Open Market Committee meetings, money is still cheap
for student borrowers who move fast.
Right now, rates are as low as 2.77 percent for students who consolidate
multiple federally backed loans such as Perkins and Stafford loans
while they're still attending school or within the six-month grace
period following graduation. Students who have been out of school
longer pay a slightly higher rate -- as little as 3.37 percent --
which is still really cheap.
Why consolidate?
First of all, a lower rate will result in big savings on interest
charges amounting to hundreds, maybe thousands, of dollars. Making
a single monthly payment to one creditor rather than to multiple
creditors cuts down on paperwork and confusion. Also, the program
allows for the loan to be paid over a longer period than 10 years
(though dragging out debt beyond that period could be considered
a drawback). Finally, these loans don't come with prepayment penalties,
and that means they can be paid off more quickly without incurring
fees.
Under the current program, private loans cannot be
consolidated, and previously consolidated loans are not eligible
for consolidation. Consolidation may not make sense for everyone.
For example, if the unconsolidated loans' rates are poised to drop
2 percentage points because payments had been made on time for 24
or 48 months, you might be better off staying put.
The new consolidation rates, announced in late May,
will be 1.93 percentage points higher.
Proposed changes to the loan consolidation program
would make it less attractive. For instance, the Bush administration's
proposed 2006 federal budget contains a recommendation that future
loans feature a variable interest rate rather than a fixed rate.
Private lenders have lobbied for this change, and the current administration
has exhibited a tendency to favor
the credit card industry at the expense of consumers. The ceiling
on the variable rate could reach as high as 8.25 percent. That would
result in higher loan payments and much higher interest charges.
Don't panic. These proposals would not take effect
until July 2006 at the earliest.
Bankrate's article, "Funds
for student consolidation loans may be cut," describes
in more detail expected changes to the program that will ultimately
place more financial strain on future college grads.
*****
Sage advice from the oracle
of Omaha
An estimated 19,000 enthusiastic shareholders of Berkshire Hathaway
descended on Omaha recently to attend the company's annual shareholder
meeting. Dubbed "Woodstock for capitalists," the meeting
has been described as an intellectually stimulating love-fest.
No wonder shareholders are a happy bunch -- Berkshire's
'A' shares recently traded for more than $84,000. This presents
copy-fitting challenges for editors of print publications that display
the stock tables. What will happen when the stock rolls over into
six figures?
The star of the show every year, of course, is chairman
Warren Buffett, whose net worth exceeds $40 billion. Hailed by many
to be the greatest investor of our time, Buffett has run Berkshire
for 40 years, following the investment principles of Benjamin Graham,
whom Buffett regards as "the greatest teacher in the history
of finance."
During Buffett's tenure, the book value of Berkshire
Hathaway grew at a rate of 21.9 percent compounded annually. Meanwhile,
the trajectory of the Standard & Poor's 500 index pales by comparison,
with an average annual gain of 10.4 percent, including dividends,
over the same time frame.
In the most recent annual report, Buffett says investors
could have easily made money over the past 35 years. "All they
had to do was piggyback Corporate America in a diversified, low-expense
way. An index fund that they never touched would have done the job.
Instead many investors have had experiences ranging from mediocre
to disastrous.
"There have been three primary causes,
first, high costs, usually because investors traded excessively
or spent far too much on investment management; second, portfolio
decisions based on tips and fads rather than on thoughtful, quantified
evaluation of businesses; and third, a start-and-stop approach to
the market marked by untimely entries (after an advance has been
long underway) and exits (after periods of stagnation or decline).
Investors should remember that excitement and expenses are their
enemies. And if they insist on trying to time their participation
in equities, they should try to be fearful when others are greedy
and greedy only when others are fearful."
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