Interest rates on federal student loans will fall to their lowest levels in history. For Stafford loans made after 1998, the new rate on most loans in repayment will be 3.42 percent down from 4.06 percent. For borrowers in a grace period or in school, rates are even lower 2.82 percent, down from 3.46 percent last year. Rates on PLUS loans for parents also fall from 4.86 percent to 4.22 percent. Older loans are priced slightly higher. “Today” financial contributor and Money magazine editor-at-large Jean Sherman Chatzky has advice on how to save money when paying back your student loans.
ON AVERAGE, ACCORDING to lender Nellie Mae, students come out of school with nearly $19,000 in student loans — that’s up 66 percent from five years ago. And many students may not know about it. According to a recent survey by Collegiate Funding Services (a student lender), more than half of the class of 2003 was unaware they could consolidate their student loans. (Note: Grads need some of that good stuff in this economy. Jobs are much harder to come by this year. According to the National Association of Colleges and Employers there were 36 percent fewer hires in 2002 than in 2001 — and no increases were expected this summer.)
The key is making sure you take advantage of those low rates for as long as possible. Federal student loans — which are typically taken out over the course of a college or grad school education — are variable rate loans. You automatically get this rate on your loan this year, but if you want to make sure you’ll be locked into these low rates going forward you have to act.
Most students come out of school with a portfolio of loans at varying rates. By rolling them all into one big loan and fixing the interest rate, students with a recent portfolio of loans will be able to consolidate at a rate of 3.5 percent (or the lower 2.82 for recent grads) for the rest of your repayment term. Type student loan consolidation into any search engine and you’re going to get a laundry list of entries. That’s because there are many consolidators out there. If all your loans are with a single lender, you must first look at consolidating with that lender. If not, you can shop around. Note: You can only consolidate once, unless you go back to school and incur additional debts. Most experts believe that doing so at these rates doesn’t present much of a risk on missing out on lower interest rates — then again, that’s what they said last year. You’ll have until July 1 2004 to lock into these new rates. So if you believe rates will fall further, you may want to wait to do the deal.
First, get a grip on your balance. The rate you’ll receive — the weighted average of all loans you consolidate rounded up to the nearest one-eighth percentage point — will be the same at all lenders. (They’re allowed to offer lower rates, but most don’t.) But some consolidators offer for good payment behavior in the future. For example, Sallie Mae offers borrowers who have at least $10,000 in debt a rate discount of 1 percent when they make their first 48 monthly payments on time. At other consolidators, that benefit kicks in faster. Borrowers can also save a quarter of a percentage point on interest if they have their monthly payments direct debited from their accounts.
IS CONSOLIDATING A WISE MOVE?
Not necessarily for people with older loans who’ve qualified for discounts on their current rate for making 24 or 48 monthly payments on time. For those borrowers, consolidating may mean swapping back to a higher rate than the one they have now. Also, holders of Perkins loans should be wary. If you go back to school or defer repayment, the government will pay your interest during that time, but that benefit is lost if you consolidate. Perkins loans carry the possibility that the loan will be forgiven if the borrower goes into certain public service jobs. Consolidating can mean the loss of that benefit.
USE YOUR GRACE PERIOD WISELY
If you’re in the 6-month grace period after school ends but before repayment begins, it makes sense to consolidate while you can grab the lower rate — but in this economy you may want to wait until the end of your grace period to do so, particularly if you have yet to land a job.
STRETCH ONLY IF YOU HAVE TO
Most student loans are scheduled to be paid back over a 10 year time frame. But when you consolidate you can extend that term to 15, 20 or even 30 years depending on the size of your balance. That will substantially lower your payments (as you would by taking a 30 year mortgage instead of a 15). But remember you end up paying much more in total interest. If you feel like the 10 year term is a stretch today, but won’t be once you get a couple of raises under your belt, you can always prepay your student loans.
Jean Chatzky is the financial editor for “Today,” editor-at-large at Money magazine and the author of “Talking Money: Everything You Need to Know About Your Finances and Your Future.” Information provided courtesy of Jean Chatzky and Money magazine. Copyright © 2003. All rights reserved. For more financial advice, visit the Money magazine Web site at: Money.com