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Consolidating student loans now will save on interest
Thursday December 22, 9:10 pm ET

If you've been thinking about consolidating your student loans to lock in a
low rate, be aware: Time will soon run out.
Congress this week raised the interest rate on popular Stafford loans to
6.8%, effective July 1, as part of a $40 billion budget-cutting measure. The
rate will be fixed, not adjustable.

That's a big change. Stafford borrowers who consolidate now will lock in a
rate of 5.375% for the life of their loans. Borrowers who are still in their
grace period can lock in an even lower rate - 4.75%. Stafford loans are
popular because borrowers don't have to show financialneed to get one.

But the higher fixed rate will eliminate that advantage. "Anybody who hasn't
consolidated should consolidate before the law goes into effect," says Mark
Kantrowitz, a financial aid expert and founder of FinAid. "The appeal of
consolidation under current law now is you're taking a variable rate and
locking in at a fixed rate."

Rates have been climbing since May. If the formula had remained unchanged,
the new Stafford rate probably wouldn't be much lower than the new fixed
rate. But under the law, borrowers will no longer benefit if rates later
decline.

In recent years, borrowers have been able to shave thousands of dollars in
interest from their loans by consolidating loans at record low rates.
Sallie Mae spokesman Tom Joyce says the change restores the original intent
of the consolidation program. "It was never intended to be a refinancing
bonanza," Joyce says. "It was never intended to be a windfall for graduates
who have already benefited from the taxpayer subsidies of the Stafford
program."

Nevertheless, any rise in student-loan rates will impose a burden on
students. Annual tuition, room and board at a four-year private college have
jumped 39% to $21,235 over the past 10 years, according to the College
Board. According to an Education Department study, two-thirds of
undergraduate students graduate with debt. The average: $19,000.

Parents will pay more, too. The rate on Parent Loans for Undergraduate
Students, or PLUS loans, will jump to a fixed rate of 8.5%, from the current
variable rate of 6.1%. Parents may be able to get cheaper loans in the
private market.

"The truth of the matter is, the way this bill generates most of its savings
is by asking students and parents to pay extra so Congress can fund extra
priorities," says Luke Swarthout of the state Public Interest Research
Groups, which oppose the bill. "This is increasing costs for the middle
class to finance college."