Grads acting soon can lower loan debt
Cox News Service
May 15, 2005
ATLANTA — Paying the bills for your education can last years longer than it took to get the education.
But debt-loaded graduates can take some of the weight off by consolidating their federal loans — and doing it before the end of June.
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Recent Hank columns: The college cost crunch |
A loan consolidation escapes that midsummer lurch because rates on consolidated loans are fixed. You lock in the current low rates, insulating yourself from future increases.
By contrast, most federally backed loans, including the popular Stafford and PLUS programs, have variable rates. They are adjusted once each year, based on the yield of Treasury bills auctioned at the end of May.
Interest rates in general have been going up in recent years, pushed by Federal Reserve decisions. Thus bidders will surely pay more for May T-bills, and student loan rates will march upward with them.
We're talking big money. About two-thirds of undergraduate students have debts when they graduate, according to the 2003-2004 National Postsecondary Student Aid Study. The average is $21,814, counting all Stafford, Perkins and PLUS loans.
It can be a lot worse. One in ten undergrads have borrowed $35,193 or more.
The numbers are large at an individual level, too. Let's say you have unconsolidated loans totaling $20,000. Right now the rate is 2.77 percent, which means you can expect to pay $191 a month for 10 years. Do nothing and you can expect an interest rate of about 4.6 percent — and payments of $208.
If you owe more than $7,500, you can choose to extend your repayment period beyond the normal 10 years. For $20,000 or more, the maximum is 20 years. If you choose that option and you qualify for the lowest possible rate — 2.875 percent — your monthly payment will be $110.
Another benefit of consolidation is simplicity. "You combine all your outstanding debt, so you have one loan with one lender," said Martha Holler, a Sallie Mae spokeswoman.
It's also worth noting that under federal law, there are no application fees, no credit checks and no pre-payment penalties.
A very big reason for consolidating now is that fixed rates themselves are under attack. Several bills in Congress and a provision in President Bush's budget proposal would require variable rates on consolidation loans.
The reason is that the government guarantees a certain yield to lenders. When a graduate pays at a lower rate, the government makes up the difference. The cost of that subsidy has grown rapidly in recent years.
Consolidation may not work for every student, however. Most lenders will not consolidate loans with low unpaid balances. For some that means nothing less than $5,000.
In addition, you get to consolidate only once, unless you go back to school and take out more loans. If rates somehow went even lower than today's levels, you couldn't take advantage.
If you choose an extended repayment period, you will lower your payments but most likely will increase the total amount you must pay.
Here are some things to consider if you're ready to start shopping:
Some lenders also offer discounts for prompt payment. Sallie Mae, for example, will lower your interest rate by 1 percent if you pay on time for 36 months.
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