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Students: Consolidate loans before it’s too late

Updated: May 3, 2013 12:14PM

Originally published: April 17, 2006

Get started early and avoid the last-minute rush to refinance your student loans, and lock in the current low interest rates before they move much higher July 1.

You have a one-time chance to consolidate your student loans and lock in a low rate for the life of your loan. If you haven’t done so already, start the process now!

It’s a story I do every year, but this year it’s especially urgent. Interest rates on existing student loans change every July 1 based on the rates set at the 91-day Treasury bill auction held at the end of May. It’s quite clear that rates on existing, variable-rate student loans could jump at least two full percentage points.

There’s another reason to consolidate existing loans even while you are still in school. Under new legislation passed last November, current students no longer will be able to consolidate while still in school.

Currently, there is a loophole that allows students to consolidate their loans while they are still in school by first asking that the loans be put into repayment status early. Once the loans are in repayment, they can be consolidated, locking in the repayment interest rate. After the loans are consolidated, the student asks for an in-school deferment to delay the repayment obligation until after graduation.

Loophole repealed

This loophole has been repealed, effective July 1, 2006, by the Deficit Reduction Act of 2005. This means current students no longer will be eligible to elect early repayment status, thereby restricting them from consolidating while still in school. So, if you’re currently a student with loans, view this short window as your last chance to lock in today’s low rates.

The current rate on existing Stafford loans is 4.7 percent, which is based on 91 day T-bills plus 1.70 percent. With the current 91 day Treasury bills at about 4.6 percent, the rate on existing loans could jump to 6.3 percent or higher on July 1, 2006.

The consolidation rate uses the weighted average of rates on a borrower’s loans, rounded up to the next one-eighth of one percent. If you’re still in school and paying current rates, the current consolidation rate is 4.75 percent on Stafford loans.

If you’re already repaying a Stafford loan, the consolidation rate is 5.375 percent. That too will increase in July.

The difference between locking in now and waiting could cost you thousands of dollars in interest over the life of your loan, depending on the amount you’ve borrowed and the number of years in repayment.

There’s more bad news about future rates on Stafford loans.

Under the new legislation, future Stafford loans will carry a fixed rate of 6.8 percent. Every year a new fixed rate will be announced. You’ll be stuck with that rate until the loan is repaid or ultimately consolidated.

Rates on PLUS loans made to parents are currently 6.1 percent for loans disbursed between July 1, 2005, and June 30, 2006. The consolidation rate for those loans for parents of current students is now 6.125 percent. PLUS loans are also tied to the T-bill rate, and will jump sharply higher in June. Even worse, new PLUS loans for parents made after July 1, 2006, will carry a fixed rate of 8.5 percent.

If you have loans from only one source, you must contact that lender. But if you have loans from multiple sources, you can contact any student loan lender to consolidate.

All must offer the same rate, and may not charge fees for consolidation.

Be sure to look for special repayment deals offered by many lenders that can lower your rate. Some will give a quarter point discount if you agree to have monthly loan repayments deducted automatically from your checking account or cut your rate by a full percentage point if you make every payment on time for two or three years.

Go online

For more information, check out or -- or one of the other consolidators you can find by doing an online search. Remember to compare terms, and check for any prepayment penalties.

One last word of advice. When you consolidate, elect to pay down your loans in 10 years or less. That way you can get on with your life and the advantages of your education a lot sooner. That’s the Savage Truth.

Terry Savage is a registered investment adviser and the author of the newly published The Savage Number: How Much Money Do You Need to Retire? (256 pages, Wiley, $24.95). Distributed by Creators Syndicate.

Copyright © Terry Savage Productions

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