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Window of opportunity on student loans

Updated: May 3, 2013 12:14PM

Originally published: March 28, 2005

It’s always difficult to graduate into the reality of paying down student debt and at the same time starting to save for your future. In fact, at a starting salary it might appear that it’s impossible to do one, if not both, of those financial tasks. But instead of hiding from the challenge, facing up to it right away can make your task a lot easier. The first step is to deal with student loans.

Many students graduate with greater student loan debt than their parents took on as a mortgage for their first home! But if you deal with that debt promptly, you might have a unique chance to pay it back at incredibly low rates.

If you know a college student who will graduate in May or June, pass on this important message: Interest rates on student loans will rise sharply on July 1.

That’s because every year the student loan interest rate is re-set based on Treasury bill rates posted at the last weekly auction in May. As we saw again last week, interest rates are on the rise, up more than 1-3/4 percentage points since last year. That means student loan rates will go up sharply on July 1.

Lock in today’s rates now

There’s nothing you can do about the rising rates if you’re still in school. Even federally subsidized loans, which have deferred interest while you’re in school, will accrue interest at the new higher rate.

But if you’re a recent graduate -- or planning to graduate in May or June -- you should act quickly to lock in today’s low rates for the life of your loan. You do that by consolidating all your loans immediately after you graduate. Every graduate has a one-time chance to consolidate student loans.

The current 3.37 percent rate on Stafford loans is the lowest in history. To consolidate and lock in this rate, you must apply before July 1. Since there’s bound to be a last-minute rush to meet the deadline, you should start the application process now -- even though you’re technically still in school and can’t finalize the process until you graduate.

Graduates who consolidate within the first six months after graduation can get an extra half a percent cut off the consolidation rate. Plus if you sign up for automatic monthly deductions from your checking account, you could cut your rate another quarter of a point.

That brings the locked-in rate to 2.62 percent for your entire repayment period, if you consolidate before July 1.

Just to whet your appetite, many 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:

Remember, student loan consolidations can only be done once. So if you’ve consolidated before, you’re out of luck. And if you graduated several years ago, your consolidated loans might have a higher minimum rate than those described above. But you’ll never know how low your rate can go until you start the process.

New regs help youngsters

If you’re already employed, and trying to pay down student loans as well as save in the company 40l(k) plan, there’s some good news for you.

Typically when young workers change jobs, companies cash out your small account in the company plan. But a new law goes into effect today that will require your employer to automatically roll over that small account directly into a default IRA on behalf of the employee, if the account is worth $1,000 to $5,000.

That automatic rollover provision will save a lot of young workers from paying tax on the distribution, as well as a 10 percent federal tax penalty. But the most important thing about the new regulations is the likelihood that more young workers will continue to keep their retirement money growing tax-deferred in the IRA rollover account. That’s good, because you’re going to need it! And that’s The Savage Truth.

Terry Savage is a registered investment adviser. Distributed by Creators Syndicate.

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