Students: Consolidate those loans

Getting Started

Your Money

April 25, 2004|By CAROLYN BIGDA

IF YOU'RE wearing a cap and gown this graduation season, the whirlwind of ceremonies and freedom from academic stress might have you preoccupied.

One matter, though, deserves your attention: loan consolidation.

The new interest rates for federal student loans will soon be set, and experts think this year's record-low levels will not last.

To hang on to them - and save on interest costs - you have to consolidate your loans and lock in the rates.

Most students take out federally guaranteed loans throughout college and graduate studies, often with different lenders.

Interest rates on these loans change every July 1 based on the last auction of 91-day Treasury bills in May.

To simplify your life, a lender, such as industry giant Sallie Mae, will wrap up your student debt into one loan with a fixed interest rate that lasts the life of the loan.

The rate you secure is a weighted average of your loans' current interest charges, rounded up to the nearest one-eighth of a percentage point.

For example, during the grace period - a six-month deferment before you start paying back your loans - consolidated Stafford loans that accrue 2.82 percent would lock in a 2.875 percent rate. And Sallie Mae says applications received before June 30 will be guaranteed the lower of the pre-July 1 and post-July 1 rates.

Why bother consolidating?

Consolidation is most advantageous for students with high debt levels, which aren't a rarity: The median education debt for undergraduates was $16,500 in 2002.

A consolidated loan will extend the traditional 10-year repayment period up to 30 years, depending on how much you owe. Because the total loan is stretched out over a longer period, your monthly obligation drops, making payments more manageable.

In addition, your debt-to-income ratio is lowered, improving your credit rating and the rates you receive on other loans. (Private loans cannot be consolidated with federal loans, but they will count toward your overall loan balance and help extend the repayment period).

Additional rate breaks are available, depending on the lender.

If you set up automatic withdrawals for your monthly payments, an additional quarter of a percentage point is cut from your rate. And after three or four years of being on time with your payments, the interest rate falls by a full percentage point. So you could be paying as little as 1.625 percent.

Federal loan consolidation is managed by the Department of Education, making the program easy for borrowers to use and secure.

Before consolidating loans, private lenders generally require that you have finished school and carry at least a $7,500 balance, but the Department of Education's direct program offers an alternative.

Applications can be submitted online at www.loanconsoli, and there are no fees.

Consolidated loans still offer forbearance and deferment options, and many lenders will time consolidation with the end of your grace period, so that you don't lose your post-graduation break.

But before you rush to sign up, keep in mind that the extended loan period will cause you to pay more in interest overall.

If you can handle a 10-year term, then opt for standard loans. Even if a measly salary makes it hard to pay the bill at first, there are graduated and income-sensitive paying plans to ease the burden.

Also, a consolidated loan might disqualify you from loan-forgiveness programs offered by certain government or teaching jobs.

Remember, the main objective is to sweep away the debt entirely, so you don't want to jeopardize any opportunity to write off the loan.

And you can't consolidate twice, though there is one trick: Leave one loan out of your consolidation package.

The government allows you to combine a standard loan with consolidated loans to take advantage of lower rates in the future.

E-mail Carolyn Bigda at

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