Updated: May 3, 2013 12:14PM
Originally published: May 30, 2005
Tomorrow -- because of today’s Memorial Day holiday -- the federal government will hold its regular weekly auction of Treasury bills. The rate set on 91-day bills will determine the new rate on federal student loans for the year starting July 1, 2005. That new rate will be nearly two full percentage points higher than the current rate, because the Federal Reserve Board has raised short-term rates eight times since last May.
The message is clear to student-loan borrowers: Lock in the current low rates for the life of your loan, by using your once-in-a-lifetime opportunity to consolidate existing loans at a fixed rate.
You probably have many questions, and the place to start is at a Web site called www.SmartLoan.com, which is the student loan consolidation division of Sallie Mae, the nation’s largest student loan consolidator. But here are answers to some of your most basic questions. Be sure to check with a consolidator to make sure all these factors apply in your situation.
What will my rate be? Not everyone gets the lowest rate on consolidation. While some can lock in a deal as low as 2.875 percent, others will pay slightly more depending on the original loan rates. So you should check with your loan originators, or one of the Web sites listed below, for information on just how far your rate will drop. Each site has online calculators, and you can actually apply for a consolidation loan online.
What loans are eligible? The most common loans are Stafford, Perkins, Plus loans and even some previously consolidated loans. The loans might have been granted to students, or might be in the parents’ names. There are special loans for health professionals that are also eligible for consolidation. But you cannot consolidate private or “alternative” education loans that are not federally guaranteed.
What if I previously consolidated? You can consolidate again -- if you have additional loans to combine with the old consolidation loan. Your new rate will be a blended rate, based on a weighted average of the rates of the loans you consolidate. But you can’t simply apply for a lower rate on your old consolidated loan; you must have new loans to put into the mix.
What if I’m still in school?There’s something new this year. Under a new interpretation of the rules, students don’t have to wait until they graduate to consolidate.
Students still in school can consolidate existing loans. If they subsequently take on more student loan debt, then they can consolidate those loans either separately from the initial low-rate consolidation, or as part of a blended package.
Suggestion: You’ll probably never want to touch that low-rate consolidation loan you can get this year.
Should I start repayment? If you’re still in school, the answer is no. You’re entitled to an in-school deferment as long as you’re enrolled on more than a part-time basis. During that period, the interest is accruing at the low consolidation rate. In the case of a federally subsidized Stafford loan, the government will pay the interest to your lender while you are in school.
Where can I consolidate? Start with your own loan originator, or check with any of the dozens of financial-services companies that are authorized to make consolidation loans. There is no fee to you, the borrower. You’ll get the same rate no matter where you consolidate. But there are subtle differences in side benefits offered described next.
Can I lower my rate? Graduates who consolidate within the first six months after graduation can get an extra one-half of 1 percent cut off the consolidation rate. Plus some consolidators give other benefits. For instance, if you sign up for automatic monthly deductions from your checking account, you could cut your rate another quarter of a point.
And just to whet your appetite, some lenders will reduce your rate again, if you make every payment on time for the next three or four years.
For more information, here are several Web sites that will guide you through the student loan consolidation process:
One final thought: Don’t procrastinate! As the June 30 con-solidation deadline looms, the financial services companies will be overwhelmed with consolidation applications. Start the process today. You’re unlikely to see student loan rates this low again in your lifetime.
Waiting could be very costly. And that’s The Savage Truth.
Terry Savage is a registered investment adviser. Distributed by Creators Syndicate.