Next month, we'll know the new variable interest rates for federal education loans, and those rates could be among the lowest we've seen in several years.
That might lead you to think about consolidating your federal student or parent loans to lock in these low rates.
Consolidating pays off your old loans and gives you a new loan at a fixed interest rate. Four years ago, when loan interest rates hit record lows, borrowers made a mad dash to consolidate to get rid of loans whose variable rates changed year to year.
Though rates have been headed down, the landscape for consolidation has changed.
Since July 2006, federal student and parent PLUS loans have switched from a variable interest rate to a fixed rate. Stafford loans are fixed at 6.8 percent; PLUS loans are set at 8.5 percent.
Under the formula used to determine the new rate on a consolidated loan, lenders use a weighted average of the interest rates on all your loans and then round it up to the nearest one-eighth of 1 percent. If all you have is newer fixed-rate loans, there is no interest rate benefit to consolidate. But if you have older loans that are at variable rate, you can benefit by locking in a low rate through consolidation. Also, if you decide to consolidate, you might need to look harder to find a lender to help you.
A growing number of lenders, including giant Sallie Mae, say they are no longer consolidating students' loans because the business isn't profitable.
Sallie Mae, for instance, says it's saving its resources to make new loans to students in the fall, given that so many other lenders are leaving the federal student loan program because of the credit crunch.
Even if your lender no longer consolidates loans, you can always find other lenders that will, or consolidate through the government's direct lending program at www.loanconsolidation.ed.gov.
And if you are going to consolidate, don't do it before July, says Mark Kantrowitz, publisher of FinAid, an online provider of student aid information.
Variable rates on federal loans are adjusted annually in July. The new rates are based on the three-month Treasury bill auction at the end of May.
Based on the T-bill auction last month, Kantrowitz projects that the interest rates on consolidation loans starting in July will be among the lowest ever.
