 Student
loan consolidation deadlines loom
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 Dear
College Money Guru,
I graduated from college in December 2005, and am currently in my
six-month grace period before I start paying back my $26,000 in student
loans. The current rate on the loans is 4.70 percent, and I know
they are adjusted annually in July. What are the interest rates
expected to do this year? Should I consider consolidating into a
fixed rate loan, or stay where I am? Thanks for any advice.
-- Robyn
 Dear
Robyn,
You're the perfect candidate for loan consolidation.
If you do nothing, the interest rate on your Stafford loans will
jump to approximately 7 percent on July 1. Part of that increase
-- 0.6 percent -- occurs because you will have entered repayment
status following the end of your grace period. The rest of the increase
comes from the escalation in interest rates over the past year.
Because we won't know the precise adjustment until next month's
Treasury bill auctions are concluded, I'm basing my estimate of
7 percent on the most recent T-bill auctions plus the federally
mandated margin of 2.3 percent.
A federal consolidation loan is a new fixed-rate loan
that pays off your existing variable-rate student loans. By applying
to your lender for loan consolidation before your grace period ends
in June, you have the opportunity to lock in at a fixed rate of
4.75 percent, potentially saving you thousands of dollars in interest
costs over the life of your loan. While it's possible that Stafford
loan rates will drop back down in future years, most forecasters
are not expecting that to happen anytime soon.
Anyone with Stafford loans already in repayment status
is eligible to lock in at 5.375 percent before July 1 with a consolidation
loan. A borrower still in school can grab the lower 4.75 percent
fixed rate through consolidation, but only by first requesting that
their loans be put into repayment status by the lender. The student
should also request deferment so that the start of repayment can
be delayed until graduation. (The grace period will be lost, however.)
Another advantage of loan consolidation is that you
can reduce your monthly payments by extending the repayment period
to anywhere from 10 to 30 years depending on the size of the loan.
A $26,000 consolidation loan qualifies for a 20-year repayment term.
To apply for a federal consolidation loan, contact
the lender on your current Stafford loans. If you obtained your
Stafford loans through the federal government's direct loan program,
you should visit http://loanconsolidation.ed.gov/
to investigate the loan consolidation process.
Parents with outstanding PLUS loans should also consider
the benefits of loan consolidation. Certain other types of federal
student loans are eligible, as well. When a consolidation loan replaces
an assortment of student and parent loans, the interest rate on
the consolidation loan is based on the weighted average of the existing
loan rates.
For new Stafford and PLUS loans taken out after
June 30, 2006, consolidation will no longer offer a rate advantage
for most borrowers. That's because recent changes in the law fix
the interest rate on these loans at 6.8 percent and 8.5 percent
respectively, effective July 1, 2006.
To ask a question of the College Money Guru, go to the "Ask
the Experts" page, and select "College financing" as the topic.
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