Consider merging college loans

The Baltimore Sun

Next month, we'll know the new variable interest rates for federal education loans, and those rates could be among the lowest we've seen in several years.

That might lead you to think about consolidating your federal student or parent loans to lock in these low rates.

Consolidating pays off your old loans and gives you a new loan at a fixed interest rate. Four years ago, when loan interest rates hit record lows, borrowers made a mad dash to consolidate to get rid of loans whose variable rates changed year to year.

Though rates have been headed down, the landscape for consolidation has changed.

Since July 2006, federal student and parent PLUS loans have switched from a variable interest rate to a fixed rate. Stafford loans are fixed at 6.8 percent; PLUS loans are set at 8.5 percent.

Under the formula used to determine the new rate on a consolidated loan, lenders use a weighted average of the interest rates on all your loans and then round it up to the nearest one-eighth of 1 percent. If all you have is newer fixed-rate loans, there is no interest rate benefit to consolidate. But if you have older loans that are at variable rate, you can benefit by locking in a low rate through consolidation. Also, if you decide to consolidate, you might need to look harder to find a lender to help you.

A growing number of lenders, including giant Sallie Mae, say they are no longer consolidating students' loans because the business isn't profitable.

Sallie Mae, for instance, says it's saving its resources to make new loans to students in the fall, given that so many other lenders are leaving the federal student loan program because of the credit crunch.

Even if your lender no longer consolidates loans, you can always find other lenders that will, or consolidate through the government's direct lending program at

And if you are going to consolidate, don't do it before July, says Mark Kantrowitz, publisher of FinAid, an online provider of student aid information.

Variable rates on federal loans are adjusted annually in July. The new rates are based on the three-month Treasury bill auction at the end of May.

Based on the T-bill auction last month, Kantrowitz projects that the interest rates on consolidation loans starting in July will be among the lowest ever.

The rate would be 2.88 percent for a Stafford loan consolidated while the student was still in school or in the six-month grace period after graduation, he estimates. The rate on a Stafford loan consolidated while the borrower is in repayment would be 3.5 percent. The rate for parents consolidating a PLUS loan would be 4.25 percent.

Those rates are at least 3.7 percentage points lower than if you consolidate before July.

Kantrowitz notes that Federal Reserve policy-makers meet at the end of the month, and any action they take on rates could also influence May's T-bill auction.

Rebecca Caldwell, who is graduating from the University of Maryland's law school next month, wrote in an e-mail that she has been thinking about consolidating.

She has about $121,000 in debt. Federal fixed-rate loans, including Perkins and Stafford loans, account for about 60 percent of that. The rest is private loans at variable rates ranging from 4.4 percent to 6.5 percent.

Kantrowitz, who looked at her numbers, recommends that Caldwell not consolidate.

The rates on her private loans are among the lowest available, he adds. She likely wouldn't get a better rate if she consolidated all her private loans into one. "If she tried refinancing, she'd probably get a worse rate since she is not yet employed and building a good credit score," he says.

Kalman Chany, author of Paying for College Without Going Broke, says Caldwell might consolidate if she plans to enter public service. Under a new law, borrowers can have their outstanding federal loan debt forgiven if they make 10 years' worth of on-time loan payments while working in certain jobs, such as public defender and prosecutor. To take advantage of this, Caldwell would have to consolidate her federal loans through the government's direct lending program.

Caldwell says she plans to clerk for a judge for a year before joining a Baltimore law firm. No forgiveness option there.

Kantrowitz figures her loan payments will be about $1,145 a month.

If she finds that too steep on a clerk's salary, she can request a repayment plan that gives her more years to repay without having to consolidate. But the longer you take to repay loans, the more you end up paying in interest.


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