Thursday, April 21, 2005

Consolidating student debt 

There are a series of articles this week out about Now is consolidating student loans before interest rates go up. Rates are currently very low on Stafford and PLUS loans, but will be readjusted to the rate on 91-day T-bills on the last auction in May. That could be 2% higher interest rates than currently.
Consolidate by June 30, and students who graduate in 2005 can lock in today's 2.875 consolidation rate for as long as 30 years.

That's slightly higher than the rock-bottom 2.77 percent Stafford loan rate for in-school students and those still in the six-month grace period after graduation. But that slightly higher rate is fixed for the life of the loan and saves more than $4,000 on the typical $20,000 Stafford loan repaid over 20 years, according to Sallie Mae, the largest source of U.S. education loans.
The Chronicle of Higher Ed (subscriber link) reports that loan companies are showing up at bookstores to allow students an opportunity to pick up a consolidation loan with their cap and gown.

And the deals may get worse, as Congress is tinkering with the laws that allow for consolidation loans, coupled with an industrial policy action to forgive loans for those who get degrees in math, science or engineering. In short, by making all loans variable rate, Congress would remove the benefit of being able to lock in low rates. And it's not a fairness issue, since one can lock in anytime -- you can simply wait for a favorable rate.

More information available from SmartMoney.