Time to consolidate student loans

No one can predict how the Treasury-bill market will change before the Class of 2007 is done paying off its student loans. "So consolidating now will let you lock in one rate and not have to worry about what will come," he says.

This year's rates will be calculated before the end of the month, and even if they increase, many lenders offer "best rate guarantee" plans. These deals give borrowers the chance to fill out all the paperwork before the new numbers are released, and whichever is lower will be the consolidated rate. The new rates go into effect July 1.

But this advice doesn't help Jason Myers, who will graduate from Boston University later this month.

He took the almost universally recommended move and consolidated his Stafford loans last summer, before the program switched from a variable rate to a fixed – but much higher – rate of 6.8 percent. But Mr. Myers says he needed another Stafford loan to finish his senior year and still has unconsolidated private loans.

Myers cannot combine them all together – each loan can only consolidate once. So what other benefits come with consolidation?

For one thing, it can lower monthly bills. Normal Stafford loans must be paid back over 10 years. But by consolidating, borrowers can stretch out their payments over 15 or 30 years, reducing the monthly costs. The sacrifice is that interest will pile up, so borrowers will wind up paying much more in the long run. (Remember, though: For some income levels, a lot of student-loan interest can be tax deductible.)

"If your entry-level salary feels a little tight, having lower monthly bills can really help," says Janet Bodnar, a columnist for Kiplinger's personal finance magazine. "You can always pay down the loan faster than necessary later on, once you've finally gotten that dream job."

Another perk, she says, is dealing with fewer bills. If a student takes out a mixture of Stafford, Perkins, and other loans, consolidating can lump everything into one tidy bill.

In the end, very few loans are repaid on time

But the biggest bonus is borrower benefits, says Walker. Since rates for consolidation are capped by the government, many lenders try to entice borrowers by offering rewards to diligent bill payers. Deals can include lowering interest rates by half a percentage point if the company can take payments automatically out of the borrower's bank account or providing cash-back deals to borrowers if the graduate makes 36 on-time payments.

Don't write off these offers as scams, says Walker. They can offer great incentives for starting out on the right track.

"But read the fine print," he warns. "Find out exactly what it means to make an on-time payment. Is one day late too late or is 15 days late too late?"

Walker adds that since these loans are paid back over such a long period of time, it's usually better to opt for a lower interest rate than a drop in the amount the borrower owes.

Kantrowitz agrees that borrower benefits can seem like a great way to save money, but he cautions that few graduates will ever see the return. Using statistics from Sallie Mae, he calculates that less than one-quarter of borrowers make their first 36 payments on time, and less than 6 percent will pay back everything on time.

"Don't assume that money is as good as yours," Kantrowitz says. "Sure, you can save hundreds, or thousands – if everything works out. But that rarely happens."

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