Q: I hear this is a good time to consolidate my student loans. How would I go about that?
A: Good time is an understatement. Picture you're driving down a highway and see the sign that says "Next gas station: 500 miles." That's the situation for student loans.
Rates for federal Stafford and PLUS loans are reset every year based on the result of a Treasury bill auction, and this year it looks like the rate is going to go up about 2 percentage points on July 1. You need to get in your application to consolidate before then to lock in the current rate, which is 2.875 percent for most loans.
Not only is the rate jumping, but this may be the last year consolidation is possible. A proposal currently in the works to reauthorize the loan program would do away with the option to lock in a fixed rate. That means loans would stay at variable rates.
Consolidation rolls all your loans together into one loan. The rate is the weighted average of the loans that go into it, rounded up to the nearest eighth of a percent. Consolidation is usually only possible for loan balances or $7,500 or more, depending on the lender. There are no fees for consolidation.
Including Perkins loans in consolidation is usually not worth it, since they already have fixed rates.
How to consolidate
Current students
If you are in school, you have to ask your lender to consolidate your loans. It used to be that only federal direct loans could be consolidated while in school, but a recent loophole discovered by financial aid expert Mark Kantrowitz means bank-based Stafford loans can be consolidated too. The legality of this loophole was confirmed by the Department of Education last week.
To consolidate a bank-based loan, ask the lender to put the loan in repayment status. Most will agree to this. If your lender does not, you can't consolidate.
After you consolidate, ask for an "in-school deferral" of repayment, which means you don't have to pay it back until you graduate.
The only drawback to doing this, according to Kantrowitz, is that you lose the normal six-month repayment grace period after graduation. However, it makes sense for practically everyone to consolidate right now, because locking in the low rate will save you much more than the grace period is worth. The 2 percentage point reduction in interest rate will alone save you about $1,100 over the life of a $10,000 loan, Kantrowitz has calculated.
"It's a no-brainer," he said.
Kantrowitz believes more than half of college juniors with loans would benefit if they consolidate before July 1. Most sophomore and freshmen will not have enough loans to make consolidation possible.
To consolidate a federal direct loan, simply ask the government lending program.
For graduates
If you have left school and have a bank-based Stafford loan, you have to first ask your lender to consolidate the loan. If you have several lenders, you can go to any one of them.
If your lender or lenders won't consolidate your loan, you can go to any other lender. If you have a federal direct loan, you can also go to any lender.
You can ask the financial aid office at your school to recommend lenders, or look at the list of largest lenders at Kantrowitz' Web site, www.finaid.org.
Shopping around can be worth it, but don't put too much stock in offers of discounts for borrowers who pay on time, Kantrowitz warns. For example, some lenders offer a 1 percentage point discount on the interest rate after 36 consecutive on-time payments. Very few borrowers end up being eligible for such discounts.
More significantly, lenders will typically offer a 0.25 percentage point discount on the interest rate for borrowers who pay by electronic funds transfer straight from a checking account.
For parents
If you are a parent with a loan from the Parent Loan for Undergraduate Students program, or PLUS, you can consolidate while your student is still in school. Do it now to lock in the low rate. Apply the rules and tips for consolidating Stafford loans.