Timing is crucial for grads consolidating college loans


May 09, 2004|By EILEEN AMBROSE

IT'S THAT time of year again when the thoughts of debt-laden college graduates turn to student loan consolidation.

The new variable rates on federal student loans will be set in two weeks and take effect for one year, beginning in July.

Experts predict the new rates will be the same as today's incredibly low rates or dip a little more. Right now, the rate on Stafford loans in repayment is 3.42 percent.

Borrowers don't have to do anything to get the new rate for the coming year. But by consolidating their loans into a single fixed-rate loan, they can lock in a low rate for terms that can last 10 to 30 years, depending on the amount of debt.

Timing is important. If rates go down, borrowers must wait until after June to consolidate loans to take advantage of the drop. If rates tick upward, they would need to act before July to get the better rate.

But there's another reason for borrowers to pay close attention to loan consolidation now. Congress is considering revising consolidation loans as part of its renewal of the Higher Education Act. Legislation was introduced last week by House Education & Workforce Committee Chairman John Boehner, an Ohio Republican, that proposes to save money by switching from a fixed rate to a variable rate for future consolidations.

The federal government subsidizes consolidation loans by guaranteeing lenders a rate of return. When the interest rate borrowers pay falls short of the promised return, the government makes up the difference.

The government's tab has climbed drastically in recent years as borrowers have rushed to lock in exceptionally low rates. In fiscal year 2003, subsidies rose to $2.135 billion, more than three times the amount of the prior year, the General Accounting Office reported.

Research, commissioned by student loan giant Sallie Mae and others, estimates that subsidies on consolidated loans will grow to $36 billion over the next seven years.

Proponents of variable rates argue that taxpayers sometimes end up subsidizing high-income borrowers.

"It was really intended to simplify and streamline payments for borrowers" and help students lower their monthly payments by lengthening the term of their loans, said Tom Joyce, Sallie Mae's vice president of corporate communications. "It was never intended to be a refinancing bonanza."

Others argue that limited federal dollars can be used better elsewhere.

"If there are subsidies, they should be targeted to students in school," said Mark Lindenmeyer, director of financial aid at Loyola College in Baltimore.

And proponents say that borrowers can benefit from variable rates. Once graduates consolidate loans, they can't do so again unless they have other outstanding student loans. By consolidating when rates are high, borrowers can't reap the benefit later when rates fall, which happened to many who consolidated several years ago, experts said.

But critics say variable rates can cost borrowers thousands more dollars in interest during the life of their loans and essentially raise the cost of higher education.

Rates have been low because the economy was weak, making it harder for new graduates to land jobs, critics point out. Being able to consolidate at a low fixed rate makes payments more manageable, they added.

"To switch to a variable rate when it's almost certain rates will increase would put a strain on borrowers at a time when students are graduating with record levels of debt," said Brad Scriber, an advocate with Consumer Federation of America.

According to a survey last year by student loan provider Nellie Mae, the average undergraduate debt is $18,900, a 66 percent jump since 1997.

It's not just borrowers that benefit from the loan subsidies, said Caroline Christensen, director of financial aid at St. John's College in Annapolis.

"Think of the returns the government and the country is getting from a well-educated work force," she said. "There is a benefit to the whole economy."

Students, too, are concerned about a switch to variable rates.

"I don't think they are taking into consideration people who don't automatically step into upper-middle-class jobs," said Rhonda Franklin, a senior at St. John's who plans to consolidate about $28,800 in loans.

In the fall, the 23-year-old will begin teaching English and math in a home-school consortium in Maryland. Her fiance, who's pursing a master's degree with the help of student loans, plans to teach high school English after graduation next year. Both jobs are deemed valuable by society but typically don't command high pay, she said.

"People that have these student loans, they want a good education so they can be good citizens, and, in our case, good teachers," she said.

Baltimore Sun Articles
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.