Students rush to consolidate loans before July 1
For the more than 2 million American college students that make up the Class of 2006, this is time for lots of celebration - and maybe a little panic. For more than 60 percent of undergraduates and more than 80 percent of professional school grads, the end of school means the beginning of student loan payments. With interest rates on federal student loans set to increase by nearly 2 percent as of July 1, many students are being encouraged to lock in lower rates now.
Undergrads borrow a median amount of more than $16,000, while professional school graduates borrow a median of more than $50,000, according to the American Council on Education. Yet those numbers only scratch the surface of borrowers' real financial obligations. Depending on the rate of interest and the term of the loan, borrowers could pay back double, even triple, the amount of the original loan.
Only a few short years ago, this scenario was hardly cause for consternation. In July 2003, the variable rate for federal student loans bottomed out at a historic low of 3.5 percent. Since then, it has climbed steadily.
"The variable rate is good for the consumer when you think interest rates are going to fall," explains Heather Boushey, an economist at the Center for Economic and Policy Research in Washington, D.C. "But the interest rate has been raised 12 or 14 times in the past few years.... If you're betting that rates are not going to go up a lot in the future, it might not be such a good bet."
The fall freshman class of 2010 won't have to worry because new statutes fix federal education loan rates for all new loans at 6.8 percent. But those with existing loans still have to make a choice: Ride the wave of variable rates or lock in a relatively low rate now.
Consolidation allows borrowers to fix their loans at a single rate that takes the weighted average of the interest rates that were in effect when the borrower first took out the loan. Conversely, the variable rate is tied to the 91-day Treasury bill rate, which was announced Tuesday at 4.84 percent, a hike from 3.0 percent set last year.
Consolidating student loans by June 30 will add up to big savings, according to lender Sallie Mae. For example, a student graduating from college this spring with a Stafford loan balance of $20,000 who consolidates before July 1 at a rate of 4.75 percent will have a monthly payment of $129. If that same student waits until after July 1, at an interest rate of 6.625 percent, his or her monthly payment would jump to $151. Waiting to apply for consolidation until after July 1 would cost the borrower $5,123 more in interest over the life of the loan.
"The clock is ticking," says Pat Scherschel, vice president of loan consolidation for Sallie Mae. "Essentially, [borrowers] have a month. The cost of being one day late is literally several thousand dollars."
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