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Consolidation, deals can save parents, new grads on loans

Updated: May 3, 2013 12:14PM

Originally published: May 27, 2004

There’s good news for millions of college student-loan borrowers and recent graduates. In spite of the trend toward higher interest rates, student-loan rates will take a slight dip starting July 1.

Whether you’re a new borrower or a recent graduate, that makes for some enticing deals. Student-loan rates are reset every year on July 1, based on the auction of 91-day Treasury bills held the last week in May. The rates set at this week’s auction, while higher than just months ago, are still below the rates at this time last year.

The rate on existing Stafford loans issued after July 1, 1998, will automatically be reset to 2.77 percent if you’re still in school, or in a grace or deferment period. And if you’re already repaying a Stafford loan, the rate will be reset to 3.37 percent, down .05 percent from last year. Rates on PLUS (parent) loans will fall to 4.17 percent.

PLUS loans are made to parents regardless of need, while Stafford loans are based on financial need. More than 7 million students and families will take out an expected $52 million in new loans this year, and these lower rates will save them a small but significant amount on their interest payments.

Real opportunity

But the real opportunity to take advantage of these lower rates comes for students who are about to graduate or who have graduated recently with loans taken out since 1998.

Every student borrower has a once-in-a-lifetime chance to consolidate student loans and lock in the rate. And if you take advantage of all the special deals now being offered, you can bring your eventual repayment rate down to 1.62 percent!

Students who graduate this spring don’t have to start repaying their loans immediately. As noted above, every year the rate on those loans will be reset. But if you act now to get the consolidation process going, you can lock in a very low rate of 3.37 percent for the life of the loan, starting July 1. That’s down from the current 3.5 percent consolidation rate.

But that’s just the start of the opportunity.

If you consolidate your loans within six months of graduation, the loan consolidators will knock an additional half a percentage point off your loan rate, bringing it down to 2.87 percent.

You can do better if you agree to have your payments taken automatically out of your checking account every month. If you sign up for that program, they’ll cut your rate by another quarter of one percentage point, bringing it down to 2.62 percent.

And if you make your payments on time for three full years, most consolidators will give you an additional one-percentage-point discount, so you could ultimately be paying only 1.62 percent in your final years of student loan repayment.

Now let’s look at the cash flow numbers for a $10,000 loan. If you’re paying 2.62 percent, your monthly payment is $95 for every $10,000 owed, assuming a 10-year payback period. If you get the three-year on-time discount, your monthly payment drops to only $90 a month.

If you consolidated that same $10,000 loan three years ago at a rate slightly below 6 percent, your monthly payment (without the special deals) would have been $111 on a 10-year basis. That extra $20 might not seem like much for one month, but it sure adds up over the 120 months of a 10-year repayment program.

How to consolidate

The first step in consolidating is to contact one of your lenders or go to one of the Web sites listed below. You can consolidate if you haven’t done a consolidation before. If your loans were issued before 1998, the rates will be slightly higher than those shown above. As with all federal dealings, the paperwork is complicated. You have nothing to lose by starting early, since you can specify that you’re waiting for the new, lower rate on July 1.

* or (800) 448-3533

* or (888) 423-7562

* (800) 2COLLEGE

The consolidation process gives you one more choice: the length of your repayment program. With these low rates, it’s tempting to stretch out the term, and use leftover income to pay down more expensive, floating-rate credit-card debt.

The answer is to do both! The time will soon come when you want to be debt-free to buy a home or start saving for your own children’s college expenses. Then you’ll be happy your student loans are paid off. That’s the Savage Truth.

Terry Savage is a registered investment adviser, and appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast. Distributed by Creators Syndicate.

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