`Game over' July 1 for student loan rate lock-in



A year ago, borrowers consolidated education loans in droves to lock in the lowest interest rates in the federal loan program's 40-year history.

Now, students and parents are once again advised that if they have any Stafford or PLUS loans left to be consolidated, do it before July 1. This may be the last time to use consolidation to lock-in exceptionally low rates before they go up and changes in the program kick in.

"Anything after July 1, game's over," said Ellen Frishberg, director of student financial services at the Johns Hopkins University in Baltimore. Frishberg's office recently sent 2,500 letters to students and parents, advising them to consolidate. It plans to follow up with e-mail alerts.

Student and parent loans for years have carried variable interest rates that are adjusted once a year in July. When borrowers consolidate, one or more loans are turned into a new loan with a fixed rate tied to the three-month Treasury bill. In recent years as interest rates fell, consolidation soared when borrowers sought to cement these extra low rates for the loan's life.

That didn't sit well with some in Congress. The federal government promises lenders a minimum return on student loans and spends billions subsidizing consolidated loans because of their low rates. But large lenders also lobbied hard for changes that would make consolidating less appealing to borrowers because those loans are the least profitable in the federal program, said Mark Kantrowitz, publisher of FinAid, an online provider of financial aid information.

Early this year, Congress cut about $12 billion from the student loan program as part of the deficit reduction act. The variable rate will disappear as part of those changes. It will be replaced by a fixed rate on new loans issued as of July 1.

The rate on new Stafford student loans will be 6.8 percent. The fixed rate on the Parent Loan for Undergraduate Students, or PLUS loans, will be 8.5 percent. These will be the rates for years, unless Congress changes them.

Another change: As of July, students will no longer be able to consolidate loans while still in school.

These rate changes Congress made won't affect existing variable loans. They will remain variable and continue to be adjusted each July. Currently, these rates are 4.7 percent on Stafford loans for students in school, in deferment or in a grace period; 5.3 percent for borrowers repaying loans; and 6.1 percent on PLUS loans.

But interest rates have been rising in the past year. And financial aid experts predict that borrowers could see their variable-rate loans jump by 2 percentage points or more in July.

"Everybody who has a variable rate loan should consolidate by July 1. It's a no-brainer," Kantrowitz said.

The consolidation formula takes the weighted average of interest rates on a borrower's loans and rounds it up to the nearest one-eighth of 1 percent. Students still in college or new graduates in a grace period can lock in a rate of 4.75 percent on Stafford loans.

The consolidation rate for those repaying Stafford loans would be 5.375 percent and 6.125 percent for PLUS loans.

Consolidating potentially can save thousands of dollars in interest over the course of the loan's life, according to calculations by College Loan Corp., a student loan provider.

For example, based on last week's T-bill auction, variable rates would rise to 6.91 percent, College Loan figures. Under that scenario, a new graduate with $20,500 in loans would save $2,656 in interest over 10 years by consolidating now.

Lenders report an uptick in consolidation applications.

Shawn Archer, an MBA student at the University of Phoenix, is among those who got their applications in early. She recently consolidated about $12,000 in student loans. "Call it a good deal," Archer said.

While many can benefit from consolidation, it's not for everyone. It won't be worth the trouble if you're close to paying off the debt, said Mark Brenner, vice chairman of College Loan.

Also, borrowers with federal Perkins loans will lose valuable loan forgiveness features by consolidating. Those with Perkins loans can have all or some of their debt forgiven if they enter certain careers, such as an elementary school teacher instructing children from low-income families.

But if you decide to consolidate, you must start with the lender that provided your loan. If you have loans from multiple sources, you're not tied down and can shop around for the best deal or service.

Many lenders, for instance, will shave a quarter-point off the interest rate if you repay the loan through automatic withdrawals from your bank account. Sallie Mae will reduce the interest rate by 1 percentage point if a borrower with at least $10,000 in debt makes three years of on-time payments. And College Loan promises a cash rebate worth 2 percent of the loan balance once borrowers make nine on-time payments.

Despite all the changes, consolidation won't disappear. "It certainly won't be the boom it has been in the last several years," Brenner said. Instead, borrowers will consolidate for all the traditional reasons.

The most common is to extend the repayment period from 10 years to as far as 30 years, depending on the amount of debt, Kantrowitz said. Stretching payments can reduce monthly costs by as much as half, he said.

Also, some borrowers might consolidate loans so they don't have to keep track of writing checks to multiple lenders each month. "It's a debt management tool," said Hopkins' Frishberg.


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