Lock In Low Student Loan Interest Rates Today
Students Can Lock In Low Loan RatesBy Albert B. Crenshaw
The Federal Reserve Board has been ratcheting up short-term interest rates lately, but thanks to the federal regulations, government-guaranteed student loans remain in a low-rate time warp.
The rates most student borrowers pay are still based on three-month Treasury bill rates from last May, when T-bills were near record lows.
But the ultra-low rates are about to disappear. On July 1, many student loan rates make their annual interest-rate adjustment, and if recent rates on Treasury bills are a guide, rates will jump about 2 percentage points.
Rates on Stafford loans, the most common student loans and ones that adjust annually, could rise to around 4.6 percent from the current 2.77 percent for students still in school, in the after-school "grace" period, or with loans in deferment. That's if T-bill rates remain where they were last Monday. For loans in repayment, rates could climb to about 5.25 percent from 3.37.
But many borrowers still have a chance to lock in a rate very close to the one in effect today and keep it there for the life of their debt. They can do this by "consolidating" their Stafford or other guaranteed student loans.
PLUS loans to parents can also be consolidated. Rates on those loans are also expected to jump about 2 points in July -- to more than 6 percent from a bit over 4 percent now -- so parents, too, can lock in a lower rate, though not as low as that for students.
Consolidation has become controversial recently as low interest rates have forced the government to pay larger and larger subsidies to private lenders and made the government's own Direct Loan program, which also allows consolidation on similar terms, more expensive. But it can save a borrower hundreds or even thousands of dollars in interest payments over the years.
Thus, students who haven't already done so should look into consolidating their outstanding loans. This includes students who are about to graduate, both because the rates will be rising this summer and because you get an even better rate if you consolidate before your loan or loans go into repayment. (The grace period mentioned above allows graduates up to six months before they have to begin repaying, thus giving them time to get a job before the repayment grind begins.)
Rates on Stafford loans, like adjustable rate mortgages, are the sum of an index (T-bills) plus a margin. The T-bill rate now being used, from last May, is 1.07 percent. The margin is 1.7 percent for in-school and grace-period borrowers, making the current rate for them 2.77 percent. The index is the same for loans in repayment, but the margin is 2.3 percent, making the current rate 3.37 percent.
If a borrower consolidates, the rate on the consolidated loan is the weighted average of the rates on the loans he or she has outstanding, rounded upward to the nearest one-eighth of a percent. That rate is fixed for the life of the loan.
At the same time, the life of the loan is extended, which has the effect of further lowering the payment, though raising the total interest if the loan is paid off on schedule.
That might seem to be a disadvantage, but experts say it need not be. In fact, they say, it adds flexibility. The loans have no prepayment penalty, so you are free to make higher payments if and when you can, shortening the life of the loan and reducing total interest paid. But if you hit a rough patch, you can make the lower minimum required payment, conserving cash while keeping your credit record unblemished.
The standard period for repaying unconsolidated student loans is 10 years; the term for consolidated loans varies from 12 to 30 years, depending on the size of your education debt. Note that education debt can include other loans used for education, so if you borrowed privately you can include that to get yourself a longer payback period, if that's what you want.
You can actually elect a 10-year repayment schedule if you wish, and income-sensitive or graduated payment arrangements are also available. And despite the name, you may "consolidate" a single loan.
To consolidate, you need to list all your outstanding loans and their interest rates. You should have records of your loans -- wake up, this is real life comin' atcha -- but, if you don't, you can go to the National Student Clearinghouse Web site at http://www.nscl.org/ , click on "students and alumni," then on "loan locator." You must supply your Social Security number and date of birth, which may not thrill the privacy conscious, but that's your penalty for not keeping these records yourself.
If all your loans are held by a single lender, you must consolidate with that lender, assuming that lender does consolidation loans (most do, but some don't).
If your lender doesn't consolidate, or your loans are held by multiple lenders, you can shop around. There are no fees or credit checks on consolidation loans, but lenders do want this business, so check around to see what benefits may be offered. Some lenders offer interest-rate cuts after you make a certain number of on-time payments.
There are nonfinancial benefits as well...
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