Normally when an advertising message screams: “Act Now! This Offer Expires Soon!!” it is a pretty safe bet once the deal deadline passes, another will take its place. But when those messages are directed at student-loan borrowers, the underlying urgency is legitimate and inaction could be costly for years to come.
“Procrastination is not an option,” says Mark Brenner, vice chairman of College Loan Corp., one of the larger student loan lenders. “Borrowers have less than two months to take advantage of an opportunity that could save them thousands of dollars.”
That opportunity involves locking into the fourth-lowest borrowing rate in the history of the student loan program. As the U.S. Department of Education resets its variable-rate Stafford loans and PLUS loans for parents on July 1, this year's rates will increase for only the second time in recent history.
Based on the most recent Treasury-bill auction, rates would reset from 5.30 percent currently — 4.70 percent if the borrower is still in school or in the grace period — to a projected 7.06 percent for Stafford Loans, according to Sallie Mae, the nation’s largest student-loan originator. PLUS loans, currently at 6.10 percent would climb to 7.86 percent.
“At the moment, borrowers who do not consolidate are looking at a 1.5 to 2 percent rate increase,” says Pat Scherschel, vice president of loan consolidation at Sallie Mae. Rates on Treasury Bills could still increase before the reset date. If they do, consolidation becomes even more attractive.
“It’s almost a no-brainer,” says Phil Johnson a certified financial planner in Clifton, N.Y. “It makes financial sense to lock in now.”
As compelling as locking into current rates is, it is not the only benefit to consolidating.
“I consolidated my loans last year, because I knew interest rates were going up and the rates were about the lowest I had ever seen,” says Susan Larys, who graduated last year from North Park University in Chicago. “Also, with seven Stafford Loans, it was very confusing. Having one loan payment a month was much simpler and consolidating extended the loan term, giving me more flexibility.”
Consolidating can extend the repayment term from 10 years to up to 30 years based on the new loan balance — the higher the balance, the longer the repayment period. Lengthening the term also lowers monthly payments — by as much as half in some cases according to College Loan Corporation’s calculations.
“The Class of 2006 should be paying particular attention,” says Brenner. If they consolidate between graduation and July 1, during their ‘grace period,’ they can ensure an even lower rate on their loans since new graduates have a six-month window after graduation where the in-school rate still applies.
While July 1 is the day the rates change, the more important date for borrowers is June 30. “Applications must be filed by midnight June 30,” explains Scherschel. The loans do not have to be disbursed by then, but as long as the application is submitted to an eligible lender they will be locked in.
For a borrower like Larys, whose seven loans were all through one lender, consolidating is restricted to that original lender. “It saved me a lot of time — I didn’t have to do any comparing,” she explains.
For those whose loans are with multiple lenders, there is a bit more legwork to do.
Each consolidator offers a different set of borrower benefits, which may include incentives like further interest rate discounts for agreeing to automatic debits to a checking account or for a history of prompt payments.
“But once they choose, they could be with that lender for as long as 30 years,” observes Pat Scherschel. “They’ll want one who will be around that long.” And whose benefits package they like.
“When looking at consolidators, borrowers should consider how much flexibility they will have down the road,” says Brian Orol, a certified financial planner with Strategic Financial Planning, Inc. in Raleigh, N.C. “They need to peel back through the layers to see whether any additional fees could be tacked on.” Of particular concern are prepayment penalties. “An inability to prepay could impact their ability to obtain an mortgage down the road,” he adds.
“Because situations differ, it is important that students know their rights and responsibilities before entering into a consolidation loan,” says Elizabeth Bickford, director of student financial aid at the University of Oregon. “They need to read the fine print to make sure they do not lose any deferments they may be entitled to.”
Students and parents will find financial aid offices good resources: “We are there to point out the pluses and minuses,” says Bickford.
A comprehensive online resource covering the various loan programs may also be found at the Citibank Student Loan-sponsored site, FinAid. It includes a summary of each consolidator’s program along with their contact information. More information may also be found online through the Department of Education’s Web site.
Because applications must be submitted to your lender by midnight June 30, Pat Scherschel recommends not waiting until the last minute to file. “Borrowers waiting until the last minute, may not know the lender was ineligible until its too late,” she warns. She also recommends filing online since it saves time and postage, and pinpoints any potential problems or errors rather quickly.
July 1, 2006 also ushers in a significant change for future borrowers. New loans will be issued at fixed rates only. These new Stafford Loans will carry a fixed rate of 6.80 percent and the new PLUS loans for parents will be at 8.50 percent, causing sticker shock for those already shell-shocked over the cost of funding college. However, rates on existing variable-rate Stafford and PLUS loans will continue to adjust annually each July 1, if they are not consolidated this year.
“Just don’t wait until the eleventh hour,” says Pat Scherschel. “Go ahead and do it now, then sit back and enjoy graduation and the beginning of summer. The rates won’t change between now and June 30.” “But,” she adds, “let it go one day too long, and it could cost thousands.”