Jeanette A. Tucker | 5/27/2005 1:53:34 AM
Now is the time to take advantage of historical low student loan rates, says LSU AgCenter family economics professor Dr. Jeanette Tucker.
May graduates and others who have not yet consolidated their federal student loans can lock in to interest rates at the current level of 2.77 percent for federal student loans taken after July 1, 1998.
Interest rates for federal student loans are adjusted on July 1 each year based on T (Treasury)-Bill rates. If you consolidate, this rate will be fixed and no longer change on July 1. T-Bill information as of May 5 puts the "would be" interest rate at 4.57 percent.
Tucker explains that student loan consolidation combines all of your eligible student loans into one new loan with a fixed interest rate and may extend the repayment term. It also may lower the monthly payment and simplify the repayment process because borrowers have to make repayments to only one company.
"Although it is true that interest rates are set by the government, it definitely doesn’t mean that all consolidation programs are equal," Tucker says, recommending to shop around comparing two key features in a consolidation program: 1) no cost—you should not have to pay anything to consolidate your federal loans; and 2) benefits—find the program that will offer the greatest benefits. These benefits typically come in the form of reductions in interest for automatic payments and/or reductions in interest for consecutive, on-time payments.
Most federal loan consolidation offers that you receive through the mail are "middle of the road." They provide some interest rate benefits, but their benefits can be beat by careful shopping. One consolidation program that many financial experts recommend as having "set the standard" is offered by the Utah Higher Education Assistance Authority (www.uheaa.org). It offers a 1.25 percent reduction in interest for paying automatically and an additional 1 percent reduction for making the first 48 payments on time (a 2.25 percent overall reduction). For someone locking in at 2.77 percent, a 2.25 percent reduction makes things look even better. A particular advantage to the Utah program is that it is open to anyone.
Tucker says the timing of consolidation is critical, particularly for students consolidating while in school. Companies use different processes to determine when your interest rate is locked. Some use the date you mail your application, some do not, however. Others may use the postmark date of when you return your promissory note (which comes after you have completed the initial application).
The anticipated heavy volume of consolidation applications is prompting some companies to inform consumers that it may take as long as 30 days from application to receive the promissory note in the mail (the time had previously been seven to 10 days). This makes applying over the phone if eligible (all federal Direct Loans) more critical since the phone process is the shortest of the three consolidation options -- phone, mail, online.
The LSU AgCenter family economist says a common myth about student loans is that you can consolidate only once. Although this can be true, it isn’t necessarily true. Any time you receive a "new" federal loan, (one which hasn’t been consolidated), you have the opportunity to reconsolidate. There is no limit on the number of times you can consolidate.
"It is important to note that by federal law, companies are not able to consolidate private or alternative loans into a federal consolidation loan," Tucker cautions. This is because federal loans are guaranteed by the federal government, and the private or alternative loans are financed by another company.
Tucker says that if you are a May graduate, contact your federal loan consolidation company immediately to lock in at the current rates before the July 1 increases. Students still in school may lock in the low interest rates, if you have at least one Direct Loan. The Direct Loan program is the only option for consolidating while in school.
For information on related family and consumer topics, visit the FCS Web site at www.lsuagcenter.com. For local information and educational programs, contact an extension agent in your parish LSU AgCenter office.