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Consolidate student loans before time runs out

Updated: May 3, 2013 12:14PM

Originally published: June 5, 2006

As forecast in my April 15 column, student loan rates will increase dramatically on July 1. Based on the May auction of Treasury bills, rates on Stafford Loans for those in school, in grace or in deferment will jump to 6.54 percent a year from 4.7 percent. Stafford Loans already in repayment will jump to 7.14 percent from 5.3 percent. And rates on PLUS loans (for parents) will jump to 7.94 percent from 6.1 percent.

Let me put my advice in bold type: If you have a student loan and have not consolidated and locked in current low rates, you must do it now -- today. This advice applies to graduates and current students, even though you may take out other loans in the future.

In order to lock in the current lower rates, you must have a “substantially completed” loan consolidation application on file by midnight, June 30.

When you consolidate your loan, the rate will be a weighted average of your existing loans. Current students could potentially lock in a consolidation rate as low as 4.75 percent, compared with a rate of 6.625 percent after July 1. Older loans might result in a higher consolidated rate.

A special note for student borrowers who are still in school: This will be the last opportunity to consolidate existing loans while you’re in school. Changes in the law mean that all future consolidations must be done after graduation.

Questions and answers

Where do I consolidate? If you have only one lender, you must consolidate with that lender. If you have loans from different lenders, you can consolidate with any lender approved by the Department of Education.

*How do I compare? By law, all lenders and consolidators must charge the same rate, and may not charge additional fees. But many lenders do offer additional special deals.

For example, Sallie Mae, a private company that is the largest lender and consolidator, will shave one-quarter of a percent off your loan rate if you agree to have your monthly payments directly debited from your checking account. Many other lenders offer this same deal.

And many lenders offer a full percentage point drop in your interest rate after you’ve paid your loan on time for 36 months. You’ll want to find a lender that offers these benefits.

*Is there anything to watch out for? Yes, you need to watch out for several key points when choosing a place to consolidate your loan.

Make sure your loan is eligible. Some lenders will not consolidate loans of less than $5,000 and others have maximum consolidation limits. Find out before you apply, since the deadline is fast approaching.

Make sure the lender is eligible. The lender must be approved by the Department of Education, and before applying, confirm that it can consolidate loans from all of your original lenders.

Ask about minimums or caps on the discount deals. A typical requirement is at least a $7,500 loan balance for automatic debit, and a $10,000 original loan balance to qualify for the prompt payment discount after 36 months.

*What if I have both subsidized and unsubsidized federal student loans? You can, and should, consolidate both types of loans. In fact, you can consolidate them into one loan without losing the benefit of the federal subsidy that not only defers interest while you are in school, but actually pays your interest for that period.

*What if I have private student loans? Private student loans can also be consolidated. These loans must be consolidated separately, and the rate will be variable and based on the student or co-signer’s credit.

*What if my parents have PLUS loans? Parents can consolidate PLUS loans and lock in current rates of 6.125 percent for as long as 30 years. The same rules apply regarding where you can consolidate.

*Which lender should I choose? Student loan consolidation has become a big business, with billions in loans outstanding. Since the loans are federally guaranteed to the lender, it is also a profitable, low-risk business. That’s why you’re seeing so many advertisements, and e-mails on the subject.

With time running short, you want a company that will let you apply online and efficiently to make sure you beat the deadline.

As long as you follow the guidelines above, and don’t procrastinate, you’ll save a small fortune in interest over the life of your loan. And that’s The Savage Truth.

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

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