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Consolidate loans while rates work in your favor
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Understanding the loan consolidation process can be about as fun and easy as that required Calculus class you nearly failed sophomore year – but unlike Calc, consolidation can save you some hard-earned cash.
Interest rates on consolidated federal student loans are at a 35-year low, according to the U.S. Department of Education. The rates change on the first of every July and are set according to the fluctuations in the market. Interest rates are almost certain to rise in just a few months, according to a Sallie Mae representative.
"We encourage our students to consolidate their loans as you can save thousands and thousands of dollars, depending on how much you owe," said Aggie Akyere, Senior Student Service Representative at Columbia University. "Say that your Stafford loan is at a 6 percent rate and the consolidation takes your interest rate down to 4 percent interest charges – that’s huge savings at the end of the year."
The average student leaves college with a loan debt that surpasses $23,000, reports Collegiate Funding Services. To take Akyere’s example, a student with a total debt of $23,000 paying a 6 percent interest rate over 10 years will pay close to $8,000 in interest alone. However, if that student consolidates at 4 percent, the total interest paid over the same amount of time would be close to $5,000. The current low rates mean that students who are still in their grace period can lock in on an interest rate of at least 2.77 percent, while those who are currently in repayment can start at 3.37 percent.
Lowering debt may not be the only incentive to consolidate now as Congress may soon reintroduce a bill that could eliminate the fixed interest rates.
Legislators from the last session tried to pass the College Access and Opportunity Act, also known as HR-4283, which would have lowered government subsidies for lenders. A provision in that act would have subjected students who consolidate their loans to varying interest rates that would change on a yearly basis. Though the bill did not pass the 108th Congress, some say it could be brought up again soon.
"It seems very likely that Congress is going to reintroduce this bill in a form similar to the last one," said David S. Baime, vice president for government relations for the American Association of Community Colleges.
Others agree with Baime. Andrea Marrero, press secretary for the U.S. House Committee on Education and the Workforce, said the bill is "going to continue to be a priority" for legislators and that she thinks it will address the fixed rate issue when reintroduced. According to Marrero, fixed interest rates may seem great now that the rates are low, but that variable interest rates for consolidated student loans are actually better in the long run.
"Ask someone who consolidated five years ago and they’re going to tell you that they are being locked out of today’s low rates," Marrero said. She noted that those who consolidated in the 2000-2001 time frame were locked into a fixed interest rate of 8.19 – just a few percentage points from the cap.
"If you had variable rates then, everyone would have access to today’s low rates," Marrero said. "(The current fixed rate policy) is not fair to all borrowers since it becomes a matter of luck and timing as to when you choose to consolidate your loans."
Regardless of the future of loan consolidation, students who consolidate before the interest rates change are likely to save big bucks. Just as in Calculus, there are plenty of resources to help you out. The best place to start is your college financial adviser’s office, or on the Web.
Lucy Kafanov
Knight Ridder/Tribune News Service