Consolidate student loans now, or wait? That's the question for some recent college graduates.
Consolidate now, and you may be able to lock in discounts that won't be available in October. Wait until July, and there's a chance you may get an even lower interest rate for the life of the loan.
Zhanna Goltser, financial aid director at the College of Notre Dame of Maryland, says a student recently approached her for advice. The student's lender gave her until the end of this week to send in her consolidation paperwork or lose potential discounts.
"What I said was, 'Please call the lender and find out what benefits you will be losing and see if consolidating now will benefit you,' " Goltser says.
There are two things going on that can affect the decision to consolidate now or later.
Congress recently passed legislation - expected to be signed any day now by the president - that will cut nearly $21 billion in federal subsidies to student loan providers on new loans made as of October.
Lenders have responded by saying they will either reduce or eliminate discounts for borrowers with loans made after this month.
Starting in October, for instance, Sallie Mae will no longer cut the interest rate on a consolidated loan by 1 percentage point once borrowers make three years of on-time payments, says spokeswoman Martha Holler.
The other issue borrowers need to weigh is the outlook for interest rates.
Federal loans issued since July 2006 carry a fixed interest rate of 6.8 percent. But loans made earlier carry a variable rate that adjusts each July.
Federal Reserve policymakers recently cut a key interest rate, which influences the rates on variable-rate student loans. If the Fed remains worried about weakness in the economy, more rate cuts may follow. So by waiting until next summer to consolidate, borrowers may be able to lock in a lower rate.
"I've heard that a lot of students are receiving mail and solicitations from lenders to consolidate before Oct. 1," says Mark Kantrowitz, publisher of FinAid, an online provider of financial aid information.
Sallie Mae has contacted 43,000 borrowers with consolidation applications pending about the consequences of waiting, Holler says. More than half have decided to consolidate before October.
(Consolidating before October benefits lenders. Lenders will still receive the higher subsidies throughout the life of loans that are made before the October deadline.)
What's a borrower to do?
Kantrowitz leans toward waiting. Most borrowers don't end up qualifying for years for discounts for making ontime payments. And lenders can discontinue those whenever they want, he says.
And Federal Reserve policymakers usually don't stop at one rate cut, Kantrowitz says.
Sarah J. Bauder, director of financial aid at the University of Maryland, College Park, agrees. "My instinct says to wait, whether that's correct or not, I don't have a crystal ball," she says. "If you look at the economy ... they have to do something again."
Those on the fence should contact their lender and find out what they might be giving up by not acting now. If you decide the discounts are worthwhile, consolidate loans while you're still in the six-month grace period so you'll get a slightly lower rate.
Goltser says her student decided to consolidate now. The student did a little shopping and found another lender willing to offer her a better rate, Goltser says.
Also remember, if you consolidate and extend the life of your loan, you could end up paying more in interest - even with a lower rate - than if you repaid the debt over the usual 10 years.
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