THE COLOR OF MONEY
Consolidate student loans to lock in low interest rates

By Michelle Singletary

The variable interest rates on federally guaranteed student loans will drop to 3.37 percent effective July 1. That's the lowest rate in almost 35 years, according to the U.S. Department of Education.

For borrowers with Stafford loans issued since July 1998, the new interest rate will be down from the current 3.42 rate set last year. The Parent Loan for Undergraduate Students rate was set at 4.17 percent, down from 4.22 percent.

The news gets even better for students who are still in school, have deferred paying their loans or are within their grace period, the six months after graduation. In those cases, the interest rate will fall to 2.77 percent from 2.82 percent. There are different rates for people currently paying their loans and those who aren't in repayment to reflect the amount of administrative work a lender has to do.

Federal student loan interest rates are variable and change every July 1. Rates are calculated according to a statutory formula, which differs depending on the payment status of the borrower.

Because the rates change automatically, you don't have to do anything to benefit from the rate drop. Your monthly payments will simply decrease.

However, borrowers do have the option to lock-in a fixed interest rate by consolidating all of their various student loans into one loan. Consolidation rates are also at historic lows, some at 3.375 percent, down from 3.5 percent a year ago.

Consolidating during the six months after graduation — the grace period — can bring even lower rates, down to 2.875 percent.

The fixed interest rate for a consolidation loan is determined by taking the weighted average of the interest rates of all the original federal student loans, rounded up to the nearest eighth of a percentage point. So when you consolidate, keep in mind that loans with higher interest rates than your Stafford loans could edge up the fixed rate you get.

Consolidation also allows you to stretch your repayment period from the standard 10 years to as long as 30 years, depending on your debt amount.

"If you can consolidate during your grace period you can save thousands of dollars," said Mark Brenner, executive vice president for College Loan Corporation, a San Diego-based student loan provider.

A graduate who locks in at the new rate of 3.375 percent will save more than $2,700 on a $20,000 loan repaid over 10 years based on historical averages, Brenner said. Consolidate your loans within your grace period, which would mean getting an even lower rate, and you could save an additional $556 on the same terms.

Parents who borrow through the federal PLUS program may also be eligible to consolidate and lock in low rates. The consolidation rate for PLUS loans will stay the same as last year at 4.25 percent.

If you already have submitted your paperwork to consolidate your loans, call your lender right away and ask if the processing can be delayed until July 1. Many lenders will oblige. In fact, some will automatically hold completed consolidation loan applications if borrowers will benefit from the lower interest rate.

If you have a huge amount of loans, I suggest you consolidate. That's because Congress is considering legislation that would eliminate the option to consolidate at a fixed rate. Some legislators want the student loan rate to always be variable.

I think it's a bad move, but there's a lot of support for this proposal.

If you consolidated last year or the year before because of fears that rates might rise, don't be mad.

"Borrowers who consolidated already or in the last two years shouldn't be kicking themselves," Brenner said.

And what can you do if you've already consolidated your student loans when interest rates were much higher?

Sorry. Just keep paying that bill because you can't take advantage of the new low consolidation rates. Federal law only allows you to consolidate once, unless you take out a new student loan not included in the original consolidation.

Are you steaming about that?

Well, don't just vent your frustration to me. Contact your members of Congress. They are debating changes to the Higher Education Act, which governs the federal consolidation program.