Urgent assignment: Consolidate student loans

Brace yourself: Just as predicted, interest rates on student loans will rise nearly 2 percentage points, making it ever more urgent for those with education loans to meet the June 30 loan-consolidation deadline.

Rates on the federally guaranteed loans will go up 1.93 percentage points on July 1, the first increase in five years and the biggest ever in a single year, according to SLM Corporation, more commonly known as Sallie Mae. Borrowers who consolidate before June 30 may get a rate as low as 2.875 percent.

Current students may apply
Even current students who are drowning under financial aid debt may have caught a life preserver.

Until recently, students who borrowed Stafford loans through private lenders had to leave school before they could consolidate their debts and lock in an interest rate.

So the historic rate hike foreshadows a much more expensive future for anyone still in school and saddled with debt.

Recently the U.S. Department of Education took another look at its consolidation rules and found some wiggle room.

A May 16 letter to the financial aid community from Sally L. Stroup, assistant secretary in the Office of Postsecondary Education, explained the department's stance. The short version: Students who received Stafford loans through private lenders (part of the Federal Family Education Loan program) can consolidate their debts while in school and take advantage of pre-July rates -- with the lender's permission.

"I think this is going to be extremely positive for the students," says Ronald W. Johnson, director of financial aid for UCLA and co-author of "Financial Aid for College: Understand and Plan Your Funding Options."

The student financial aid community is "happy about anything that will save students money," says Sandy Baum, senior policy analyst with the College Board. "And this has the potential to save a lot of students money."

Provisions that give the green light to in-school consolidation have "been in the Higher Education Act all along," says Dan Madzelan, director of forecasting and policy analysis in the Office of Postsecondary Education. But there "really hasn't been a reason to do this previously. Why would you want to enter repayment early if the government is paying the interest on your loan?"

Now that rates will climb July 1, there is a reason.

The increases also magnify what had been a minor difference between two different types of Stafford loans. Students who got their loans through the government's Direct Loan Program have always been entitled to consolidate at any time. Students who obtained the same type of loans from private lenders through the FFEL program had to wait until they left school.

Ironically, students don't choose where their Stafford money comes from. "The school does," says Barry Morrow, president and CEO of Collegiate Funding Services, a student loan provider.

To consolidate or not to consolidate ...
Rates are based on the 91-day Treasury bill, and are "pretty easy to track," says Morrow.

While the new rate increase may seem small, when multiplied by thousands of dollars in debt over decades, the savings can be substantial. The average student graduates from a private college with approximately $20,000 in federal student loans, says Madzelan. For public colleges, the figure is closer to $16,000, he says.

For a student who has borrowed $17,125, consolidating at the 2.8 percent rate before July 1 could save $2,479 over a 15-year loan at 4.5 percent, according to figures prepared by the University of California. For $23,000 over 20 years, the student could save $4,652.