THE COLOR OF MONEY
Borrowers should consolidate loans to extend their payment power

By Michelle Singletary

If you are a saver, you're probably reeling from the pitiful interest rates being offered for money held in a savings account.

But if you are a borrower, you're probably rejoicing that interest rates are at record lows. This is particularly true if you're a college graduate with student loans you may want to consolidate, which enables you to bundle all of your federal loans into a single loan. Consolidation also allows you to lock in a rate and stretch your repayment period from the standard 10 years to up to 30 years, depending on your debt amount.

So if you haven't consolidated your student loans, get ready to jump for joy.

The variable interest rate on federal student loans for 2003-04 will drop to the historic low of 3.42 percent as of July 1. Parents who borrowed to help their undergraduates will get a new rate of 4.22 percent.

The news gets even better for recent graduates. If you consolidate your loan during the grace period — the six months following graduation when borrowers normally are not required to begin repayment —your rate will be 2.875 percent, down from 3.5 percent.

"I don't have a crystal ball but I can't see how rates can go lower than this," said Mark Brenner, general counsel for College Loan Corp., a leading student loan provider. "The federal student loan program has been around for 38 years and I have never seen rates this low before."

Many students might not be getting the word, however. In a recent national survey of the class of 2003, 53 percent said they were unaware they could consolidate their federal loans, according to Collegiate Funding Services, a provider of student loan products.

Brenner said a borrower who locks in at the new low rate will save $6,459 on a $22,000 loan repaid over 15 years. Graduates who lock in before the end of their grace period will save an extra $1,200 over the same period.

It's a good thing that rates have dropped because college graduates are carrying a heavy debt load.

Undergraduate student loan debt has increased significantly since 1997, according to a loan survey conducted by Nellie Mae, a leading provider of student loans.

The average undergraduate debt in 2002 was $18,900, up from $11,400 in 1997. Those who attended private four-year colleges borrowed the most, averaging $21,200 compared with those who attended public four-year colleges, who averaged $17,100 in loans.

Low interest rates over the last several years have been the saving grace for graduates, according to the Nellie Mae survey. The increase in education debt monthly payments has been less than the increase in debt levels.

In 2002, the average monthly payment on undergraduate debt was $182, compared with $161 in 1997. This 13 percent increase in monthly payments is much lower than the 66 percent increase in undergraduate education debt.

"While no one likes to graduate with student loan debt, recent college graduates should consider themselves lucky to have this amazing interest rate environment," Brenner said. "This is an incredible option for borrowers in a relatively tough job market. Consolidation can make their payments more affordable."

If you're graduating this year or you haven't already consolidated your federal student loans here's what you should consider:

• Some lenders may require a minimum amount to consolidate your loans. So, check around.
• When you consolidate, you lock in the weighted average of all your student loans, rounded up to the nearest one-eighth of a percent. Interest rates on most student loans are calculated based on the 91-day Treasury bill. If you have certain federal loans that are fairly current loans you can now consolidate at a rate of 3.5 percent.
• Consolidating under current rates will lower your monthly payments, but overall finance charges may increase if you extend the loan repayment period.
• If you don't want to extend the life of your loan, you can still consolidate just to take advantage of the new lower rate.
• Most educational loans have a maximum repayment period of 10 years. A consolidation loan allows you to extend repayment to 12, 15, 20, 25 and 30 years. But you can pay your federal loan off at any time because there is no prepayment penalty.
• You can consolidate your federal loans only once, unless you have new loans that were not included in the original consolidation.
• If you choose to consolidate your loan right after you graduate (which will allow you to lock in the 2.875 interest rate), you don't get the grace period. Your first payment is due no more than 60 days from the date of the consolidation loan.

For more information on whether you are eligible to consolidate your student loans, contact the Federal Direct Consolidation Loans Information Center at (800) 557-7392 or at loanconsolidation.ed.gov.

I know that right now you may be celebrating having completed college. But don't miss out on something that can save you a lot of money as you start your new future.