There is good news for those of you facing student loan repayment and a tough job market. The federal government recently changed the variable interest rate on student Stafford and Plus loans, so borrowers looking to consolidate can now take advantage of the lowest rates in history.
The government lowered the interest rate for student loans by about seven percentage points. Current students and recent graduates still in their six-month grace period saw their rates drop from 3.4 to as low as 2.7 percent.
Now more than ever, this lower rate can help everyone. As tuition costs climb, student loans are needed more and more by American families. According to the Department of Education, families borrowed $32.7 billion in federal loans in 2002. That’s up 16 percent from the year before.
If you are a student already in repayment, you can also breathe a little easier. Your variable rate fell to 3.4 percent, down from 4 percent. Parents that took out Plus loans and are already in repayment have also seen their rates drop to 4.2 percent, from 4.8 percent.
Parents looking to help fund their kids’ education now will get a much better rate through the Plus loan program, rather than having to take out a second mortgage. While mortgage rates have fallen by one-third over the last three years, college loan rates have fallen by more than one-half.
However, students with smaller balances shouldn’t be in a rush to consolidate. People with relatively small balances choosing to consolidate into a long-term fixed rate are looking at simply a longer term of payment, with little or no savings for the borrower.
The real savings begin with loans that carry larger balances. But it’s important to take advantage of these new rates while they are still available. The government is planning to stop offering fixed-rate student loans in July 2004, so future borrowers will have to settle for variable rate loans that could increase their repayment amount dramatically should interest rates rise.
If you have just graduated, or will graduate this year and haven’t consolidated already, here are some things to think about if you are interested:
- If you choose to consolidate at these new rates, your monthly payment will go down, but you may see an increase in finance charges if you extend the payment period beyond the standard 10 years. If you still want to consolidate but not extend the term, you can still take advantage of the lower rates ahead.
- Borrowers can only consolidate student loans once, unless you have another qualified loan not included in the original package. So be careful! Timing is everything.
- If you choose to consolidate right after you graduate, you lose the standard six-month grace period. You will typically have to go into repayment within 60 days. Once again, timing is crucial. But you have to get in the door in time to take advantage of those great new rates at 2.7 percent, so weigh your options carefully.
Still aren’t sure if a consolidation loan is right for you? Then take the time to call around and ask. Lenders such as American Collegiate Financial Services or Sallie Mae, employ lending counselors to help determine if consolidation is right for you.
If you still need help figuring out if you are eligible for consolidation, or wish to learn more, call the Federal Direct Consolidation Loans Information Center at 800-557-7392 or head to loanconsolidation.ed.gov. Remember, these great rates won’t last long, so get in while you can if you are going to consolidate.
Jose Vazquez, a marketing major at Western Illinois University, has been awarded 27 scholarships, amassing more than $100,000 in aid to date. He is the author of the book Free Cash For College: The Everyday Students Guide To Financial Aid, available at vazquezmedia.com. Vazquez is also a public speaker that gives seminars on financial aid and scholarship strategies.