You’ve heard about refinancing in the mortgage market. Who
hasn’t? Interest rates are at all-time lows. Folks have
refinanced two and three times in as many years to save
thousands of dollars in interest they would have otherwise paid.
There’s a similar lesser-known boom happening in the world
of federal student loans, because refinancing or consolidating
them can also help borrowers save thousands of dollars in
interest expense.
The two most common types of federal student loans available
today are Stafford loans (for students) and PLUS (Parent Loans
for Undergraduate Students). The variable interest rates on
these loans are the lowest they have been in over 30 years
– currently, Stafford loans carry a variable rate of 3.46%
while the student is in school, deferment and grace, and 4.06%
in repayment. PLUS loan interest rates are currently 4.86%
regardless of the student’s status. If those rates would
hold over the standard 10-year repayment term, that would be the
end of this story. But, they won’t hold. Federal student
loan interest rates reset every year on July 1; Stafford loans
rates can climb as high as 8.25% and the PLUS cap is 9%.
The great news for borrowers is that consolidating these loans
locks in a low interest rate. The formula for determining a
Federal Consolidation Loan interest rate is to take the weighted
average of the interest rates of the loans the borrower wishes
to consolidate and round it up to the nearest 1/8%. So, for
example, if a borrower had only Stafford loans in repayment
issued since July 1, 1998, the variable interest rate on these
loans is currently 4.06%, and the fixed interest rate for that
borrower’s consolidation loan would be 4.125%.
That’s 4.125% for the life of the loan - which can be up
to 30 years depending on the borrower’s level of
indebtedness.
Now, that’s a deal every person with student loans should
be considering right now. Because on July 1, 2003 rates will
reset.
And there are other advantages to federal student loan
consolidation. With extended repayment and graduated repayment
options, borrowers’ monthly payments can be reduced by 50%
or more – especially helpful to recent graduates trying to
make ends meet. And, if a borrower has multiple lenders and
multiple monthly payments, consolidation lets the borrower make
a single and (generally) a lower payment to a single lender
– simplifying bill payment and improving cash flow.
Finally, federal student loan consolidation is free –
there are absolutely no fees to consolidate.
Although the terms of a Federal Consolidation Loan are exactly
the same, regardless of who lends you the money, a number of
lenders are offering incentives to get borrowers to consolidate
with them. And, these incentives can save borrower hundreds,
even thousands of dollars in additional interest. Most common is
a .25% interest rate discount when borrowers agree to repay
their new consolidation loans electronically (direct debit). A
more significant discount is offered by some lenders when
borrowers make timely monthly payments on their new
consolidation loans. For example, ConsolidateYourLoans.com
offers a 1% interest rate reduction after the borrower has made
the first 36 consolidation loan payments on time. Other lenders
offer the same discount after 48 or 60 payments, and others
offer lesser discounts at other payment intervals, but the idea
is the same. Just keep in mind, the faster you get the discount
and larger the discount is, the more you can save.
There are a handful of federal student loan consolidators and,
right now, the volume of loans they are originating is large,
but manageable. Most consolidations are completed in 45-60 days.
But, you can bet that the number of people seeking consolidation
is going to grow as the deadline (June 30, 2003) approaches, and
lenders will see an unprecedented number of requests that will
most certainly bog the system down to some extent. So, if loan
consolidation sounds like a good idea to you, read on to see if
it warrants your further investigation and, if it does, get your
application in quickly.
Is Student Loan Consolidation Right for You?
Federal student loan consolidation is a great financial
opportunity, but it's not right for everyone. To make the best
choice for you, you should consider the following: Q. Can you
take on a longer repayment term in exchange for lower monthly
payments? A. For most borrowers, loan consolidation extends the
repayment term from the standard 10-year (Stafford loan) term to
up to 30 years, depending on your balance. A longer repayment
term means that, unless you prepay your loan, you will pay more
interest than you would on your unconsolidated loans. You can
control your interest cost by choosing one or more of the
following: ·Request a shorter repayment term than your balance
allows. ·Loan consolidation programs offer a number of repayment
options. If you can afford it, choose an equal payment plan. You
should always make monthly payments that are as large as you can
comfortably afford, and an equal payment plan will cost you the
least because you are paying all principal and interest due each
month. A graduated repayment plan will reduce your monthly
payments in the early years, and you might need to choose one of
these plans to make ends meet, but they will cost you more in
total interest. ·Prepay your loan whenever you can. Just send a
note in to your loan servicer with your over-payment asking that
it be posted to your principal balance. ·Don't get behind in
your payments. Interest will continue to accrue on your unpaid
balance, costing you more.
Q. Do you owe enough and have enough time remaining in your
repayment term to really make a difference? A. In today’s
rate environment, regardless of indebtedness, most people who
have graduated recently or have been repaying their loans for
less than 5 years will benefit. To get a rough estimate of your
savings with a consolidation loan, go to
www.ConsolidateYourLoans.com, click on “Calculate My New
Loan”, complete the simple worksheet and click
“Consolidate”.
About the author:
Elizabeth Belli is National Director of Marketing for Student
Trust Inc. in Rockville, MD. Prior to that, she spent 10 years
with Sallie Mae, the largest student loan company in the U.S.
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