The U.S. Department of Education recently announced that student borrowers, even those who are still in school or the grace period immediately after graduation, may consolidate existing government-backed students loans and lock in the low interest rates currently available. Interest rates, possibly as high as five percent, will be announced July 1, so consolidation could potentially save student borrowers or their parents thousands of dollars.
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Most student loan guaranteed by the federal government have variable interest rates that are tied to the three-month Treasury bill, according to the Washington Post. The interest rates are adjusted annually based on May’s final T-bill auction. By combining multiple, or even a single, student loan into a Federal Consolidation Loan, borrowers get a fixed interest rate but also benefit from a single monthly payment and a longer repayment term.
The Higher Education Act permits Federal Family Education Loan Program (FFELP) borrowers who do not have an “in-school” status to consolidate student loans. On May 16, 2005, the Department of Education issued guidance permitting students currently enrolled in school to consolidate their loans but only if they enter repayment early. If current students do choose to consolidate, they lose the “grace period” which is usually a six-month period after graduation. For that reason the decision whether or not to consolidate must be carefully considered weighing the benefits of a low fixed interest rate against the value of delaying repayment until, presumably, the student has an income with which to make monthly payments.
“This is one of a lifetime of financial decisions that students will face. Students must weigh their options – a period or the opportunity to fix a low interest rate,” Sallie Mae spokesperson Martha Holler told the Washington Post.
“While entering repayment early is not without its consequences, borrowers who are currently in school may decide that they cannot pass up the opportunity to fix a low interest rate for the life of their loans,” says Patricia Scherschel, vice president of loan consolidation for Sallie Mae.
Assistant Secretary for Postsecondary Education Sally Stroup believes that those with the most debt are most likely to find the consolidation opportunity appealing.
“Particularly for students who are in graduate school, people with a high balance, it would make a difference,” Stroup told the Associated Press.
According to the Associated Press, the College Loan Corp. estimates a borrower with $20,500 in debt (the average amount consolidated) would save more than $2,100 over a ten-year period by consolidating at the present rate. Bob Shireman, director of the Institute for College Access and Success at the University of California, Berkeley cautions that student savings may be at taxpayer expense. He told the Associated Press that the consolidation policy “offers borrowers lower interest rates and some relief from the burden of debt” but will be more expensive for the government.
Assistant Secretary for Postsecondary Education Sally Stroup disagrees saying the unpredictability of interest rates makes it impossible to estimate the cost to the government.
While no one really know what the long-term effect of consolidation will be on borrowers or taxpayers, most experts agree there will be an increase in the marketing of and application for consolidation loans before July 1.
“What will happen now is that there will be fairly aggressive marketing by organizations that say ‘Consolidate with us.’ Borrowers need to take a look at all the different features in order to make sure that they get the best deal that they can,” Brett Lief, president of the National Council of Higher Education Loan Programs told the Daily Bruin.