June 30, 2006
Student Debt Consolidation – Student Loan Rates Going Up
College students who have piled up debt to finance their education may save thousands of dollars when paying off their federally backed loans if they consolidate them this month, lenders and college officials say.
Student loan consolidation lets borrowers combine all federal student loans they have received into a single loan at a fixed rate and extend the payback period.
Even students who still are in school and plan to borrow again to finish their education ought to consider consolidating and locking in today’s lower interest rates on debt they’ve accumulated so far, they say.
But borrowers have to act quickly.
The government set new interest rates, which take effect July 1, on the money students already have borrowed to pay for college. The interest rate for former students will rise to 7.14 percent from 5.3 percent on Stafford loans, which are the type most commonly used.
The rate on money previously borrowed for students still in school will climb to 6.54 percent from 4.7 percent.
New loans for students taken out after July 1 will be at a fixed rate of 6.8 percent.
With the average annual cost of attending four-year colleges topping $12,000 at public schools and $29,000 at private ones, students typically have borrowed between $15,500 and $19,400 by the time they earn a bachelor’s degree, according to The College Board.
Consolidation has been the talk of university financial aid offices since spring, when officials began anticipating that rates would rise significantly. Consolidation allows students to package all the federal loans they have received into a single loan at a fixed rate, and if they wish, extend the payback period beyond the normal 10 years.
“This is the first time in my 25 years of student loans that I am seeing financial aid administrators at every college promoting consolidation loans,†said Tom Mrozinski, who heads Marshall & Ilsley Corp.’s student loan operation.
A graduate of the class of 2006 with $20,500 in loans will save $3,245 over the course of a 10-year repayment period by consolidating before the new rates take effect, according to the College Loan Corp., a student loan provider based in San Diego.
But students still in college — particularly those who just completed their junior year — should look into consolidating their loans too, experts say.
Mrozinski said a current student who has accumulated $10,000 or more in federal loans should seriously consider consolidation.
By locking in at 4.75 percent now — the consolidation rate is slightly higher than the 4.7 percent rate on Stafford loans — a current student can avoid the 6.625 percent consolidation rate that will go into effect for loans combined after July 1.
A student with $20,000 in debt who consolidated today at 4.75 percent would pay $129 a month for 20 years, said Richard George, general counsel for Great Lakes Higher Education Guaranty Corp. in Madison, Wis. A consolidation loan on $20,000 at 6.625 percent after July 1 would cost $151 over 20 years, he said. Although an extra $22 per month may not seem like a big deal, over the life of the loan it ends up costing the borrower more than $5,000 extra.
While the benefits of consolidation to students still in school are obvious — a lower locked-in interest rate and the opportunity to extend the payback period — there are drawbacks to consider:
•When they graduate, students who consolidated loans while still in school won’t automatically get the six-month grace period given to those who don’t consolidate.
•Students who greatly extend the payback period when they consolidate will pay more in interest over time.
•Students who borrow more money to finish their education will have two sets of payments.
PLUS loans, which are loans parents take out for their child’s education, also can be consolidated and locked at lower rates before July 1.
College loans are unique to each borrower, so examples and definitions don’t apply to all students, lenders said.
Loan consolidation to-do list
•The first step in consolidating is to contact your lender. You will need to provide details of each student loan you wish to consolidate.
•The new consolidation loan will be opened in your name for the exact amount you owe. The new loan’s proceeds are then used to pay off each holder of your existing loans.
•Repayment on a consolidation loan begins within 60 days of disbursement, unless the borrower qualifies for a deferment or forbearance.
•A deferment allows a borrower to postpone repaying the loan for a specified period. Most federal loan programs allow students to defer their loans while they are in school at least half time.
•Forbearance can be an option for borrowers with temporary financial difficulty, and allows the borrower to suspend or reduce payments under certain circumstances for specified periods.
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bill
05/28/2007 at 5:37 pm
It takes money to make money. The debt incurred for a higher education is money well spent.