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So June 30 was a crucial deadline for students and families carrying student debt.
It forced many to rush to consolidate outstanding loans before higher rates kicked in at the start of July.
New rates for 2007-08 came out last week. Federal law sets the maximum interest rates and fees that lenders can charge. Rates for new fixed-rate loans are the same as last year. Rates for consolidation of existing loans are the same as or only slightly higher than last year's.
So this year, borrowers can take their time shopping for consolidated loans. If they don't act by June 30, the new rate isn't much higher. And by not consolidating now, they preserve their right to consolidate at a later date, perhaps after all sorts of interest rates start to decline.
That could happen if the Federal Reserve finally lowers its key federal funds rate.
Also, with more time to shop around it should be easier to find a loan from a lender not on a school's preferred list. Recent investigations found that some schools funneled borrowers to certain lenders, in return for kickbacks. At least one state is investigating whether colleges steered students to preferred lenders that did not have the best loan rates.
Rates differ for various groups of borrowers.
If you are a student, you may already have an existing variable rate loan, at 6.54%. No new variables have been issued since June 2006. If you got a fixed-rate loan in the past year, it would be at 6.8%. Both of those formats were often for popular Stafford loans.
A parent's fixed-rate loan in the past year would have cost 8.5%. Those are called PLUS loans.
The July Jump
After July 1, old variable-rate student loans rise to 6.62% for students still in school or recent graduates. The new rate is 7.22% for someone who left school more than six months ago.
Old PLUS variable loans to parents rise to an 8.02% rate from 7.94%.
For a new fixed-rate Stafford loan as of July 1, all borrowers will pay 6.8%. That's their rate now, too. New PLUS loans for parents will stay at 8.5%.
Another option is to consolidate your federally guaranteed loans.
Then, you will have only one debt to repay. That simplifies paperwork for anyone who has taken loans for several years of school.
Rates on consolidated loans are rounded up to the nearest one-eighth of a percentage point. So consolidating individual loans on which you're paying, say, 7.14%, will result in paying 7.25%. That's the case whether you consolidate now or after June.
If you consolidate PLUS loans in June, you will pay 8%. After June, you will pay 8.125%.
Why consolidate and pay more interest?
It's simpler to track and pay one bill vs. multiple loans.
You might not have to pay a rate as high as 7.25%. Many lenders offer incentives that effectively lower the rate you pay.
Consolidating student debt changes your loans from variable to fixed rates. You can plan without worrying about future increases.
Another benefit can come from extending the repayment period.
Federal student loans, as they're often called, usually have 10-year repayment terms.
"Consolidating loans can stretch repayment to as long as 30 years," said Mark Kantrowitz, publisher of FinAid.org, an online guide. That applies if your loans top $60,000.
Borrowers with less debt who consolidate can qualify for repayment periods of 12 to 25 years. Extending repayment with consolidation can reduce monthly payments.
And lower monthly obligations may make it easier to get a home mortgage or qualify for a larger loan.
Federal student loans can be prepaid with no penalty. So extending the term doesn't have to mean repaying the debt for 25 or 30 years.
As your income goes up, you can pay down your loan balance.
Public Service Perk
And federal loans may be deferred or even forgiven under certain conditions. That's the case for people who go in to certain public service careers like teaching.
But consolidating student loans can have drawbacks. You may make the wrong bet on interest rates.
After federal student loans have been consolidated, the same package of loans cannot be re-consolidated. You will be locked in to a rate. You won't be able to take advantage of any future declines.
By law, rates on consolidated loans are capped at 8.25%. Now, with consolidated loan rates at 7.25% and up, there is only limited risk of paying higher rates for consolidation.
But there's a substantial risk you will be locking in a rate that will seem high in a few years. |
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