Updated: May 3, 2013 12:14PM
Originally published: May 29, 2003
Interest rates on federal student loans are about to drop. So if you’re one of the millions of graduates paying interest on more than $190 billion of outstanding student loans, you could get a big break on monthly payments.
Rates on federal student loans, including the popular Stafford loans, are tied to the 91-day Treasury bill rate at the last auction in May. When that auction took place Wednesday, rates had fallen nearly three-quarters of a percentage point from a year ago. So the new rate on Stafford loans will fall to 3.42 percent starting July 1.
If you’re still in school, there’s no need to take action. The new low rate will be applied automatically to your loans. But if you’re already out of school--and especially if you’re a recent graduate--you’re going to get a once-in-a-lifetime opportunity to lock in those low rates for the life of your loan.
Loan consolidation deals
Student loan borrowers have the opportunity to consolidate all their loans, but it can only be done once. Because consolidation loans are rounded up to the next highest eighth of a percentage point, consolidating older loans that are already in repayment will give you a lifetime rate of 3.5 percent.
But if you’re just graduating, there’s an even better deal. New graduates get a six-month grace period before they have to start paying down their loans. But if you consolidate within that six-month period, you’re entitled to another six-tenths of one percent discount on your loan rate.
That means instead of paying the new 3.42 percent rate on current loans, your consolidated rate would drop to 2.875 percent. I’ll say it again: Consolidate your student loans within the six-month grace period after graduation , and you can lock in a rate of 2.875 percent for the life of your loan!
That means the monthly payment on a $20,000 consolidated loan for 10 years would be a manageable $192 per month.
But that’s not the end of the good deals. Most lenders will shave another quarter of one percent from your rate if you agree to make your payments by an automatic monthly deduction from your checking account, bringing it down to 2.625 percent for the life of your loan.
And if you pay on time for at least four years, some lenders will drop the rate another full percentage point.
So you could be paying only 1.62 percent interest on the final years of your student loans.
What to do now
The new loan rates don’t take effect until July 1, and they remain unchanged for the coming year. So unless you’re trying to capture the discount for consolidating within six months of graduation, you don’t have to rush to consolidate your loans.
But if you’re about to graduate, or graduated after December 2002, you’ll want to catch that one-time opportunity to lower your rate by six-tenths of one percent. So the first step is to contact your original lender--or one of the original lenders, if you have several loans outstanding. (Loans granted before 1998 have other rate limitations, so you’ll want to check the opportunities for all your loans.)
You can also contact one of the major student loan consolidation services. There is no fee to consolidate your student loans. And only approved lenders and consolidators can handle this for you. Check with:
* www.SallieMae.com; (800) 448-3533.
* www.CollegiateFunding.com; (800) 918-7587.
* www.CollegeLoanCorp.com; (800) 2COLLEGE.
All of these companies have knowledgeable representatives to guide you through the process of consolidating your student loans.
And one more thing to consider: With these low rates, you’ll want to pay off your loan in 10 years, instead of stretching out the payments for 15 years or more. Yes, these are the lowest rates on debt you’re likely to see. But the time will come when you want to be debt-free to buy a home or start saving for your own children’s college expenses.
When you think about it, a college education now looks like a better investment than buying a home. The finance rate is lower --3.42 percent vs 5.37 percent on mortgages--and the upside potential may be a lot higher for college to increase your lifetime income than for home prices to rise from here. And that’s The Savage Truth.
Terry Savage is a registered investment adviser and is on the board of directors of the Chicago Mercantile Exchange and McDonald’s Corp. She appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast.