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Slice payments on student loans

Drops in US interest rates open the door for some borrowers to refinance federal plans

By Steve Dinnen Special to The Christian Science Monitor / July 23, 2001



Here's welcome news for millions of current and former college students with government-backed tuition loans: Interest rates on the billions of dollars they've borrowed have hit the lowest level in decades.

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Aggressive interest-rate cutting by the Federal Reserve Board has trickled down to federally backed Stafford loans, which students use to pay for tuition, and to the PLUS loans that parents use. On July 1, the interest rate on Staffords was lowered 2.2 percentage points to 5.99 percent. It's now 6.79 percent on PLUS loans, also down 2.2 percentage points.

A potentially bigger bonus for the 16 million people who owe $250 billion on student loans is that they may be able to bundle their existing loans into one - a consolidation loan - and likewise take advantage of plummeting interest rates.

Better yet, consolidated loans carry a fixed percentage rate, compared with the variable rates charged for unconsolidated loans.

"Locking in the [new] low rate serves your best interest," says Ryan Katz, a spokesman for Del Mar, Calif.-based Student Loan Consolidation Center (www.slclloans.com). Lenders, ranging from his company to the nation's largest banks and even the Department of Education (800-557-7392; www.loanconsolidation.ed.gov), typically don't charge a fee for consolidation, which has been available for years but is popular this year because of the hefty rate drop.

Consolidation simplifies the repayment process, allowing borrowers to make payments to one lender rather than many.

Borrowers can also stretch out their repayment period from the typical 10-year cycle to maybe 20 years. This cuts the burden on their finances and hopefully lessens chances of default, which the Department of Education estimated in 1998 to be at 6.9 percent of borrowers within the first 18 months of their repayment period.

Early this month, Taffney VandeVoorde consolidated her $22,000 in debt, cutting her monthly bill from $272 to $150, and stretched its 10-year term to 15 years. But the pharmaceuticals saleswoman from Bettendorf, Iowa, plans to extinguish her debt early by paying the original amount.

"Now I'm going to whack it out in double time," says Ms. VandeVoorde, a 1997 graduate from the University of Iowa.

Jack and Sherie Soesbe have the same idea in mind for the $30,000 in PLUS loans they've accumulated sending their daughter, Kendra, to the College of Charleston in South Carolina. Mr. Soesbe, of Rapid City, S.D., says he was "pleasantly surprised" by the consolidation program that he estimates will save him $400 to $600 yearly.

Soesbe plans to double up on payments, noting that there is no early repayment penalty on the loans.

While there's no way to predict how many people will consolidate, the Department of Education estimates that the lower rates will save the average borrower $50 yearly on a $4,000 loan. It says that the average consolidation loan is for about $19,500 and that the cheaper rates can shave as much as $2,600 off a student's total repayment bill.

As with any government-backed program, read the fine print. Rates are higher for loans taken out prior to July 8, 1998. People who have consolidated loans in the past aren't eligible. Likewise, those who consolidate now won't be eligible for further decreases, should rates drop again. Consolidations also are meant only for people who have already left school or who have dropped below half-time status.

Different lenders require different minimums to consolidate. Some will work only with loan totals of $10,000 or more, some with $7,500.

"It's very much a custom product," says Pat Scherschel, a spokeswoman for student-loan giant Sallie Mae (800-448-3533). That is especially true for the way the loans are consolidated, since they may pull together a number of loans that carry different original and repayment rates.

While consolidation may seem complicated, lenders do their best to smooth the way. They'll take care of all the paperwork of notifying original lenders, and Wells Fargo Education Financial Services notes that it, along with many other lenders, will accept loans made by someone else.

The new interest rates will stay in effect until June 30, 2002.

(c) Copyright 2001. The Christian Science Monitor