Time to consolidate student loans
Graduates may be inundated with offers. Here's some advice from the experts.
from the May 14, 2007 edition
Page 2 of 3
Another new wrinkle: The Class of 2007 is the first to graduate with fixed-rate federal Stafford loans. Before July 1, 2006, when all Stafford loans had variable interest rates, consolidation was a good move for almost every borrower, says Mr. Walker. It was the best way to lock in low-interest rates before they could climb.
"Last year, it was a no-brainer that students should consolidate," he says. "This year, it is not quite as clear."
For variable-rate loans, consolidation is wise
For most people who still have older, variable-rate loans, consolidation is still a good bet, says Rob LaBreche, president of consumer marketing for College Loan Corporation, a top student lender.
"For students graduating this year, 3 out of 4 of their [Stafford] loans will still have variable rates, and those rates will change again this summer," he says. New rates are tied to the interest on three-month Treasury bills, and Mr. LaBreche expects that rate to rise this year, "though not by much."
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.)
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