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Thinking about consolidating your student loans? There's
no better time to do it than now -- or by no later than June 30.
That means you should get the paperwork started as soon as possible.
Rates for variable loans will climb a whopping 1.84
percentage points. The rate is based on the 91-day Treasury bill
auction that took place May 30.
These rates apply to Stafford loans issued between
July 1, 1998, and June 30, 2006. They will continue to have a variable
interest rate that is reset each July 1 -- unless you consolidate.
The out-of-school variable interest rate will be reset
to 7.14 percent on July 1. For students who remain in school or
in a grace or deferment period, the new rate will be 6.54 percent.
PLUS loans issued to parents of undergrads will be reset to 7.94
percent effective that day.
By law, variable rates for Stafford loans are capped
at 8.25 percent; for PLUS loans, they may not exceed 9 percent.
Meanwhile, the rules have changed for new loans that
will be issued after June 30 of this year. New Stafford loans will
be fixed at 6.8 percent, while new PLUS loans will feature a fixed
rate of 8.5 percent.
What happens if you consolidate?
Consolidation loans allow borrowers to group together
multiple variable-rate federal student or parent loans at a single
fixed rate. That rate is determined by taking the weighted average
of the interest rates of your original student loans and rounding
up to the nearest one-eighth percent.
Borrowers with a Stafford loan already in repayment
are eligible to lock in a consolidation loan at a rate as low as
5.3 percent before the July 1 deadline. Borrowers still in school
or in their grace period can claim the lower 4.7 percent rate, but
only by first requesting that their loans be put into repayment
status by the lender. While the student can request deferment to
delay payments until after graduation, the grace period will disappear.
"This is the last hurrah for in-school borrowers,"
says Eric Solomon, a spokesman for education finance company Nelnet,
in Lincoln, Neb.
Those who consolidate over the next few weeks stand
to save big. According to Nelnet, student loan borrowers in their
grace period or in-school deferment with a $20,000 balance and 20-year
consolidation term can save more than $5,000 in interest over the
life of their loan by filing a consolidation application before
July 1.
Loan consolidation is one way to help manage
your debt and potentially lower your payments.
Once you consolidate, you can send your new lender
one monthly payment. The standard 10-year repayment period can be
stretched out anywhere from 12 to 30 years, which helps lower your
monthly payments, but also adds to the overall interest you'll pay.
Borrowers who can afford to make their payments without
stretching the term should do so, says Robert Shireman, executive
director of the nonprofit Project
on Student Debt in Washington, D.C., and Berkeley, Calif.
"Alternative payment plans that prevent borrowers
from going into default are a good thing, but in many situations
borrowers end up paying much more in total interest over a longer
period of time," he says. "It's not necessarily a gift
from the lender."
One final word of warning: If you hope to qualify
for student
loan forgiveness by pursuing certain public service careers,
do not consolidate your Perkins loan. Only the portion of your Perkins
loan that remains unconsolidated is eligible for forgiveness.
Next up: "Student
loan forgiveness programs"
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