Lock in low student loan rates -- Page 2

The situation is different this year. Students who graduated in May or June, should lock in immediately and not wait to the end of the six-month grace period. By putting off consolidation to the last minute possible, a graduate will be unwittingly locking in the new, higher rate that starts in July.

Those who want to consolidate will need to complete the process before July 1 in order to benefit from the low interest rate.

Pros and cons of consolidation
Not ready to give up one moment of those blissful, payment-free six months? There are a couple of ways you can shave down the interest rate and still keep your grace period.

Some lenders will reduce the interest rate on a consolidation loan by a quarter percent when you sign up to have your monthly loan payment debited from a checking or savings account. A lender may also knock down your interest rate by 1 percent after you make 48 consecutive on-time payments.

Information, applications and calculators for consolidation loans are available on the Sallie Mae, Collegiate Funding Services and College Loan Corporation and NelNet Web sites. Information on consolidation loans from the US government is available on the US Department of Education Web site.

Don't forget to contact your student loan lenders. They'll have information on consolidation loans as well. Ask plenty of questions and be as specific as possible. The aim is to find out how your particular mix of student loans might be consolidated. A general example won't do.

Not sure what lender is handling your student loans? The National Student Clearinghouse has a freeloan locator service on its Web site.

A lot of companies have jumped into the student loan consolidation game in the past year or so. Choose your lender carefully.

"Make sure you know who you're dealing with," says Don Bouc, president of NelNet. "Make sure you know the history and the reputation of the company."

Should you consolidate or wait?
If your student loan payments add up to more than 8 percent of your gross monthly salary, you're a good candidate for a consolidation loan.

Someone making a salary of $30,000 a year may have a tough time making monthly $200 student loan payments in addition to rent, car payments and other expenses.

"Cash flow for new grads is always an issue, and consolidation is a way to help with that," Bouc says.

Let's look at an example provided by NelNet.

Let's say you're looking to consolidate $20,000 in Stafford loans during your repayment period. A 10-year consolidation loan would give you a 3.37 percent interest rate for the life of the loan and a monthly payment of $197.

With a 20-year consolidation loan you'd get the same low interest rate and your monthly payment would be $115, a savings of $82.

An extra $80 a month can make a big difference when money is tight. Is high-interest credit card debt weighing you down? You could tack an extra $80 on your credit card payment each month until your balance is gone.

And you can always plop that extra 80 bucks right back into your monthly loan payments as soon as you can spare the cash. There are no prepayment penalties with federal consolidation loans. So you can pay more than your required monthly payment anytime you want.

When not to consolidate
As good as a consolidation loan may sound, it's not for everyone. Anyone participating in or planning to participate in a loan-forgiveness program would want to pass on a consolidation loan. Why consolidate your debt when you can cancel it instead?

A college grad can cancel part or all of their federal education debt by working in public service jobs -- lower-paying professional jobs that serve low-income communities -- or by volunteering. Loan forgiveness programs are available to everyone from teachers to nurses to young doctors and lawyers to Peace Corps volunteers.

Teachers who work in low-income elementary or secondary schools may be able to cancel as much as $5,000 of their federal Stafford loan debt. The five grand gets eliminated from a teacher's loan balance after he or she completes five years at a designated low-income school. Bankrate.com has more information on loan-forgiveness programs.

Borrowers who are approaching the end of their repayment terms may want to pass on consolidation, as well. With such low interest rates on education loans, they may be able to knock out a good chunk of their remaining principal by boosting their monthly payments. Paying an extra $50 a month is a good place to start. Paying an extra $100 is even better. Weigh your options carefully.

Natalie Graveney contributed to this story.