updated 6/14/2005 12:44:20 PM ET 2005-06-14T16:44:20

If you've got a bunch of student loans, consider consolidating them — and fast! You have until June 30 to do so at current low-low-low interest rates. Rates for Stafford loans have recently been 2.77 percent while borrowers are in school and for the first six months after graduation, and 3.37 percent after that. PLUS loans recently carried a rate of 4.17 percent.

These rates are about to increase — significantly (by nearly 2 percent) — for the first time in several years. Beginning July 1, the new Stafford variable rate will be 4.7 percent for those borrowers still in school or in their six-month grace period, and 5.3 percent for those in the repayment phase. Parent PLUS loans will see rates jump to 6.1 percent.

As I've noted before, the effect of consolidation can be significant. As a Kiplinger's magazine article pointed out, "Consolidate a $20,000 Stafford loan at 2.88 percent and you'll pay $110 per month, including about $6,300 in interest over 20 years." If you don't consolidate, you pay 5.38 percent and your total interest cost would double to $12,700. Those in medical or dental school with massive borrowing may save tens of thousands of dollars by consolidating.

Financial columnist Jean Chatzky recently pointed out another reason to consider consolidating: "... there's a movement in Washington to end the process. A bill in the House sponsored by Rep. John Boehner, R-Ohio, who chairs the House Education and Workforce Committee, would make consolidated loans variable as well. President Bush suggests similar changes in his budget, noting it would save the government $255 million over the next 10 years. Once fixed-rate consolidation is gone, it's likely gone for a long time."

Some notes:

  • By consolidating, you'll likely lose the six-month grace period nestled between graduation and the commencement of repayment. But consolidating may still be well worth it. And though you lose the grace period, you still don't have to begin paying until you finish school.
  • While your monthly payment will probably be smaller after consolidation, your total cost may increase if you're significantly stretching out the payment period. In other words, if your loans have four years left on them, your consolidated loan may give you a fresh 10 to 30 years to pay. You can save a lot of money by paying off the new loan early. If you owe $110 per month, try to send in considerably more than that as often as you can.
  • Private lenders can help you save even more by offering you even lower rates. Check with the likes of Sallie Maeand Citigroup.
  • You may be able to have your payments automatically deducted from your bank account. This can help you avoid missing payments and can keep your credit report in tip-top shape. That's no small thing — good credit can help you buy a car or home and save money. Learn how to check your credit report and why you should want to.
  • Get details. Ask about any penalties involved and the repayment terms, among other things.

Before taking any action, learn more from our friends at the Department of Education and, as they offer many important additional details.

LongtimeFoolcontributorSelena Maranjiandoes not own shares of any companies mentioned in this article.


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