Student Loan Consolidation
If you’re eligible, it’s very important to consolidate your Federal student loans prior to July 1. The Department of Education sets the student loan interest rate (variable if not consolidated) to go up or down on July 1 of each year. The rate you receive depends on several factors. The first is the type of loan you have. The second is the date the loan was disbursed. Third is whether or not you are currently in school. You receive a discounted rate while attending school on some Stafford Loans. Finally, the rate is based on the 91-day rate from the last Treasury auction in May and the average one-year constant maturity Treasury yield (CMT) for the last calendar week ending on or before June 26th.
It’s not possible yet to know the CMT, however FinAid.org already has some predictions on about how much interest rates will increase this July. The CMT is only used in the calculation of interest for Federal PLUS loans disbursed prior to July 1, 1998. Everything else uses the Treasury rate.
FinAid.org states the following:
The interest rate on the Stafford Loan starting July 1, 2005 is 5.30% during the repayment period and 4.70% during in-school and grace periods, an increase of 1.93% over the previous year’s rates. The interest rate on the PLUS loan is 6.10%, up from 4.17%. So the era of historically low interest rates on student loans has ended. Interest rates are expected to increase by a further 1.5% to 2.0% on July 1, 2006, returning to historical averages. In addition, Congress is proposing to change the consolidation loan program from a fixed interest rate to a variable interest rate starting July 1, 2006. All students who can consolidate should consider consolidating their loans by July 1 in order to lock in current rates.
If you want to know the impact, here it is:
Before July 1, 2005, the rate for students in school and in their 6-month grace period was 2.77%. If you were paying the out-of-school rate, this would be paying 3.37%. If you signed up for EDA (Electronic Debit Account) which automatically deducts payment from you bank account each month it would further decrease your interest rate by .25%, making your interest rate if you were out of school and paying back your loans at 3.12%. Of course, many former students have also earned 0.8% deduction in their interest rate by making 12 payments in a row on time.
Without consolidating, on July 1, 2005, if you continued at the in-school rate of 2.77%; your interest rate would jumped to 4.7%. Not quite double, but a significant jump. If you were paying the out of school interest rate at 3.37%, then your rate would jump to a whopping 5.3%. With the .25% discount for EDA, that’s still 5.05%.
In other words, consolidating was important back in 2005, locking in a low, fixed rate. However, it’s still important to do so before the rates increase again in 2006, potentially bringing up loan rates to over 7%.
What about students in school now? You can only consolidate once, after all.
The answer isn’t simple. After all, once you consolidate, that’s it. Also, once you consolidate, you lose your grace period if you are currently in your grace period. However, consider the amount of money you’ll save not paying high interest rates on what you’ve already been loaned by the government. The rates are not likely to go down again. Actually, they’re likely to go up and the cap on student loan interest rates is 8.25%. That’s as high as it can go. Do you have more loans behind you than ahead of you? It might be worth consolidating and taking what you can get.
There’s also this handy fact. Once you consolidate, you can add in additional disbursements for up to 180 days from the date of the original consolidation. Let’s put this into perspective. 180 days is approximately 6 months, and if your consolidation goes through by the end of June, you’ll be looking at the beginning of December. If this is your last year in school, you should definitely consolidate. It’s probably a good idea to consolidate if you’ve got half your potential loan disbursements already. Think of it this way. You’re on the 5-year program and have already completed 3 years, this means you’ve already got the majority of your loans behind you. Plus, if you consolidate at the lowest rate, you can wrap in your Fall disbursement as well (and depending on your school, possibly your Spring disbursement). You’re keeping the rate for the majority of your loan down at a very low rate. If you’re taking out a total of $50,000 over the course of your entire education of 5 years, then you’re paying the low rate on $35,000 - $40,000 and the variable rate on $10,000 - $15,000.
An important caveat to note is not everyone can consolidate through Direct Loans immediately. If you have a non-Direct lender, you may need to get turned down first if you are consolidating Direct loans with non-Direct loans. According to our own Liz, it probably has to do with DLS being a purely government agency competing with places like Sallie Mae.
This is not the easiest thing to comprehend until they tell you that you don’t qualify to roll in all of your loans. Read more here. Some of the specifics include:
A borrower _who recently graduated_ and wishes to consolidate a Direct Loan with other Federal education loans _is eligible_ for a Direct Consolidation Loan.
**A borrower _in repayment_ who wishes to consolidate an FFEL with other Federal education loans (no Direct Loans) and has been _unable to obtain a Federal Consolidation Loan is eligible_ for a Direct Consolidation Loan.
A borrower _in repayment_ who wishes to consolidate an FFEL with other Federal education loans (no Direct Loans) and _is able to obtain a Federal Consolidation Loan with acceptable income-sensitive repayment terms is NOT eligible_ for a Direct Consolidation Loan.
So consolidate, and consolidate before July 1. As long as your application is received by June 30, you’ll lock in a lower rate. Just remember, the closer to the July 1 deadline, the busier the consolidation center will be. If you carry Direct Loans, you can do this online at the Direct Loan Servicing Center, at the Loan Consolidation website or by calling 1-800-557-7392 to get the forms to mail in. The TDD number for the hearing impaired is 1-800-557-7395.
Notes:
This article borrows heavily from a posting and subsequent comments on my personal blog from June 03, 2005 entitled Consolidate Your Student Loans.
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