No-brainer: Combine your student loans now

Normally when an advertising message screams: “Act Now! This Offer Expires Soon!!” it is a pretty safe bet once the deal deadline passes, another will take its place.  But when those messages are directed at student-loan borrowers, the underlying urgency is legitimate and inaction could be costly for years to come.

“Procrastination is not an option,” says Mark Brenner, vice chairman of College Loan Corp., one of the larger student loan lenders. “Borrowers have less than two months to take advantage of an opportunity that could save them thousands of dollars.”

That opportunity involves locking into the fourth-lowest borrowing rate in the history of the student loan program. As the U.S. Department of Education resets its variable-rate Stafford loans and PLUS loans for parents on July 1, this year's rates will increase for only the second time in recent history.

Based on the most recent Treasury-bill auction, rates would reset from 5.30 percent currently — 4.70 percent if the borrower is still in school or in the grace period — to a projected 7.06 percent for Stafford Loans, according to Sallie Mae, the nation’s largest student-loan originator. PLUS loans, currently at 6.10 percent would climb to 7.86 percent.

“At the moment, borrowers who do not consolidate are looking at a 1.5 to 2 percent rate increase,” says Pat Scherschel, vice president of loan consolidation at Sallie Mae. Rates on Treasury Bills could still increase before the reset date. If they do, consolidation becomes even more attractive.

“It’s almost a no-brainer,” says Phil Johnson a certified financial planner in Clifton, N.Y.  “It makes financial sense to lock in now.”

As compelling as locking into current rates is, it is not the only benefit to consolidating. 

Student loan stats — 67 percent of undergraduates graduate with some debt. — The average student loan debt among graduating seniors is $19,202. With PLUS loans it rises to $21,814. — Graduate students borrow an additional $27,000-$114,000 over the average student loan debt. — The amount of financial aid available for the 2004-2005 academic year was over $122 billion. — Seven out of 10 undergraduates receive some sort of financing. — 11 million loans were made to students and families in 2002. — Since the creation of the federal programs, more than $485 billion in student loans have financed more than 50 million students at over 6,000 schools. Sources: FinAid.org, Sallie Mae

“I consolidated my loans last year, because I knew interest rates were going up and the rates were about the lowest I had ever seen,” says Susan Larys, who graduated last year from North Park University in Chicago. “Also, with seven Stafford Loans, it was very confusing. Having one loan payment a month was much simpler and consolidating extended the loan term, giving me more flexibility.”  

Consolidating can extend the repayment term from 10 years to up to 30 years based on the new loan balance — the higher the balance, the longer the repayment period. Lengthening the term also lowers monthly payments — by as much as half in some cases according to College Loan Corporation’s calculations.

“The Class of 2006 should be paying particular attention,” says Brenner. If they consolidate between graduation and July 1, during their ‘grace period,’ they can ensure an even lower rate on their loans since new graduates have a six-month window after graduation where the in-school rate still applies.

While July 1 is the day the rates change, the more important date for borrowers is June 30.  “Applications must be filed by midnight June 30,” explains Scherschel. The loans do not have to be disbursed by then, but as long as the application is submitted to an eligible lender they will be locked in.

For a borrower like Larys, whose seven loans were all through one lender, consolidating is restricted to that original lender.  “It saved me a lot of time — I didn’t have to do any comparing,” she explains.

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