Lenders are bracing for an onslaught of borrowers trying to consolidate their federal student loans, now that the rates are set to jump by nearly 2 percentage points in July - the largest single-year increase in decades.
The new variable rates on federal loans are tied to yesterday's 91-day Treasury-bill auction. The rates will be in effect from July 1 through next June.
But by consolidating their loans before the July deadline, borrowers can switch to a fixed cost based on today's rates, which are the lowest in the student-loan program's 40-year history. And more students are eligible to consolidate this year thanks to a recent government decision.
As a result of yesterday's auction, the interest rate on federal Stafford loans issued since July 1998 automatically will jump from 2.77 percent to 4.7 percent for students in school or those in deferment and grace periods.
Borrowers now repaying on their loans will see their rate rise from 3.37 percent to 5.3 percent. It marks the largest single-year increase in student loans since 1981, according to College Loan Corp., a student loan provider in San Diego.
"At this point, it's such a steep increase that it's a no-brainer [to consolidate] if you can," said Mark Kantrowitz, publisher of FinAid, an online provider of student loan information. "This is the last chance. They should not procrastinate."
The new variable rate on a Parent Loan for Undergraduate Students, or PLUS loans, will be 6.10 percent, compared with the current 4.17 percent.
Consolidation rates differ slightly based on the government's formula for the loans.
Students still in college and new graduates in a grace period can lock in a rate of 2.875 percent by consolidating. Borrowers already repaying on Stafford loans can secure a fixed rate of 3.375 percent.
Depending on the amount of debt, a borrower can extend the life of the loan from 10 years to as much as 30 years.
Consolidating can save big bucks over time. A new graduate with $20,500 in loans would save $2,842 over 10 years by consolidating before July, according to College Loan.
More borrowers will be eligible for the savings this year thanks to new guidance from the Department of Education. The agency said students can consolidate loans through private lenders while still in school instead of waiting until after graduation. Previously, only students involved in the government-run direct lending program could do this.
Last year, 1.2 million borrowers consolidated loans through private lenders, Kantrowitz said. "The consolidation volume this year will probably double, maybe triple," he said.
Calls up 25 percent
In the past 60 days, College Loan has seen a 25 percent increase in calls from borrowers and a 25 percent increase in consolidation applications, said Mark Brenner, the company's president. Calls and applications are expected to only increase in the last few weeks before the new rates kick in, he said.
Sallie Mae, another student loan provider, also has been fielding more calls, as well as alerting borrowers and lenders to the proposed changes.
No one wants to have to tell a customer on July 2, "Sorry, you're too late," said Martha Holler, a Sallie Mae spokeswoman.
While consolidation has many benefits, it might not be for everyone. Those who have consolidated loans can't do so again unless they have taken out new loans.
Kantrowitz advises against consolidating federal Perkins loans because by doing so, borrowers would forfeit favorable interest rate and loan forgiveness features.
Also, students consolidating while still in college need to weigh the consequences.
To consolidate through private lenders while still in school, students must first request early repayment, seek an in-school deferment and then consolidate, Kantrowitz said. They forfeit the usual six-month grace period, so that once they graduate, loan repayments will kick in within 60 days, he said.
Also, lenders typically require that a student has at least $7,500 in federal loan debt before consolidating, so freshmen students might not have enough to qualify. Sallie Mae recently lowered its consolidation loan limit to $5,000.
Shop around first
If loans come from more than one lender, students can shop around among institutions before consolidating.
Some lenders offer discounts, such as cutting the interest rate an additional quarter-point if payments are made through automatic withdrawals from a bank account.
Parents can consolidate their loans, too. The current consolidation rate on PLUS loans is 4.25 percent.