This year, instead of scrambling to consolidate student loans by July 1, the smart money is on waiting until after that date — because interest rates are expected to drop.
The catch: Fewer lenders are offering loan consolidation.
Every July 1, interest rates reset for the year for variable rate Stafford loans for students and PLUS loans for parents. Stafford and PLUS loans made after July 1, 2006 are at fixed rates and not subject to consolidation.
Interest rates on the older loans are tied to the interest on three-month Treasury bills based on the last auction in May. Until this year, interest rates have risen every year.
Why would you want to consolidate variable rate student loans?
|3 reasons to consolidate:|
A mad dash to lock in rates
That anticipated jump has brought on a mad dash each year during the last week of June to consolidate loans and lock in the current year’s lower interest rate. This year, however, interest rates are expected to drop about 3 percentage points after July 1, from around 7 percent to about 4 percent, says Mark Kantrowitz, publisher of the student financial aid Web site,
“In previous years, there has always been a rush to get the paperwork in before the June 30 midnight deadline,” Kantrowitz says. “This year, July 1 is not the end point. It’s the starting point.”
Lenders dropping consolidation
You may be out of luck if your current lender has dropped out of consolidation loans as part of the Federal Family Education Loan Program, or FFELP. “Lenders representing 83 percent of fiscal year 2007 volume have suspended participation in consolidation loans — and I don’t understand why the other 17 percent are still making consolidation loans. If the lender isn’t out of it now, they will be out of it by July 1,” says Kantrowitz.
That’s because consolidation loans are putting lenders in the red. “Existing consolidation loans, even for banks, are not profitable,” Kantrowitz says. “The joke is, ‘Congress took away half the lenders’ profit and the credit crisis took away the other half.'”
The College Cost Reduction and Access Act of 2007 cut subsidies to lenders, eating into their already thin profit margins. As for the rest of the profit margin: The subprime mortgage crisis has rippled through the lending industry, driving up the cost of funds.
“Every time a lender makes a consolidation loan, they’re losing money,” Kantrowitz says. “It’s been a riches to rags story for these lenders.”
|How to consolidate|
But although new students, especially those with FICO scores below 650, may have trouble getting loans, people who already have loans should have no trouble consolidating, according to Kantrowitz and the Department of Education. Here’s what to do:
Wait until July 1
Don’t even start the consolidation paperwork until July 1. “Wait until July 1 to make sure you’re not going to have a lender who files the paperwork too soon and locks in your loans at the higher rate,” Kantrowitz says. And if you have a Perkins loan, investigate carefully before consolidating because consolidation eliminates some Perkins loan benefits.
Check with your current lender
It’s a long shot, but try your current lender just in case that lender has remained in the consolidation market, says Betsy Mayotte, director of regulatory compliance and privacy for American Student Assistance. Next, try your local bank. “Most local banks, rather than turn someone away, will at least have some sort of referral service,” Mayotte says.
Or just go directly to the Department of Education’s
Direct Loan program for a consolidation loan. “Don’t even try to find a federal lender,” recommends Kantrowitz.
You’ll have plenty of company at Direct Loan.
“I’m projecting it’s going to be a five-fold increase in consolidations for the Direct Loan program, more than double the previous peak,” Kantrowitz says. “The federal government isn’t going to lose money (on consolidations) because its cost of funds is much lower than the lenders’ cost.”
But Kantrowitz and the Department of Education assure borrowers that the program is adding staff, hardware and software — as well as ramping up training — to handle the expected increase. “They’re not expecting operational difficulties,” Kantrowitz says. “They’re gearing up for a significant increase.”
Consider unified lending
Not eligible for consolidation? This year, a higher minimum balance may be required to consolidate, but if you’re not eligible for this or there are other reasons you can’t consolidate, you can still get some of the benefits of consolidating your loans. If you simply want one bill for all your loans, most lenders offer unified billing if all your loans are with that lender, Kantrowitz says.
If you need lower loan payments now but expect your income to rise as you advance in your career, Direct Loan and FFELP each offer options that have lower payments in the beginning, with payments gradually increasing.
Try to reduce the loan’s term
Finally, if you do consolidate your loan and get that lower interest rate, consider making the same payment as before so you can reduce the term of the loan. With a lower payment, you’d be saving money on your monthly budget, but you’ll pay back more money in the long term because you’ll pay more in interest over the life of the loan. And do you really want to be pay on your college loans at the same time you’re putting your own kids through college?
“What I tell them is, pay off the debt as quickly as they can,” Kantrowitz says. “Student loans have no prepayment penalties.”
Karen Haywood Queen is a freelancer writer in Williamsburg, Va.