Canisius grad Jennifer Sicignano didn’t know it, but her financial outlook brightened on July 1. That’s when interest rates on federal student loans took a steep dive, meaning she’ll get a break when she starts making payments on her $7,000 loan in December.
“Hopefully, it might go lower,” the economics major from Buffalo said of the interest rate.
Homeowners aren’t the only borrowers who can benefit from today’s rate environment. Thanks to Alan Greenspan and the Federal Reserve, the time may be right to consolidate federal student loans — and “PLUS” education loans taken out by parents — in order to lock in rates that have plunged to record lows under 6 percent, experts say.
Holders of multiple loans or even a single loan, like Sicignano, can take advantage of consolidation to lock in a permanent rate. Eligible for consolidation are both of the two main types of student loans, Direct Loans from the Education Department and Federal Family Education Loans, which are issued by banks. Both are called Stafford loans, but the repayment options can differ from lender to lender.
On July 1, the variable rate on student loans issued after 1998 fell to 5.99 percent, (less for borrowers still in school or less than six months past their graduation.) That’s almost 3 percentage points less than the previous rate, adjusted annually by the Education Department. Rates on Parent Loans for Undergraduate Students (PLUS loans) fell as well, to 6.79 percent from 8.99 percent.
Variable student loans taken out before July 1, 1998, carry rates somewhat higher, but at less than 7 percent, still an attractive point to lock in.
“This is the lowest it’s been,” said Michael Woodruff, associate director of financial aid at Buffalo State College. More than half of Buffalo State students take out Stafford loans to help pay annual attendance costs of $11,000.
“When I was in school in the late 1960s it was 7 percent, then it went to 8 percent — right now is a good time for students to borrow,” he said.
It’s also a good time to think about consolidating to make the current rate permanent. Application can be made over the phone in some cases, although PLUS consolidation Loans: New rates save $136 per $1,000 over 10 years loans require a credit check. Applications usually take three to six weeks to process, lenders say, either through the Education Department program or Federal Family program lenders like NELnet and Sallie Mae.
“The activity has definitely boomed in the consolidation area,” said Anne Frye, senior vice president of the National Education Loan Network or NELnet, holder of $4.2 billion of student loans. “It’s not just recent graduates, it’s people who have graduated in the last two or three years.”
But because of a confusing welter of loan rules and cut-off dates — this is a federal program, after all — grads will have to do some cramming to determine if consolidation will save them money.
“Some borrowers are choosing not to consolidate because they already enjoy rate benefits for on-time payment,” said Patricia Scherschel, head of consolidation loans for Sallie Mae in Reston, Va., the largest provider of student loans. Unlike some other lenders, Sallie Mae doesn’t offer on-time payment incentives on consolidation loans.
Rates on federally subsidized student loans are reset each year on July 1, based on the rate of the 91-day Treasury bill plus an added amount defined by statute. About 15 million people in the U.S. owe money on student loans.
The exceptions are loans issued before 1993, which carry fixed rates. Those loans are also eligible to be rolled into consolidation, but don’t expect a big break. For people with a mix of loans at different rates, the rate on a consolidation loan is the weighted average of the loans being consolidated, rounded up to the nearest one-eighth of a percent. Consolidation loans are also capped at 8.25 percent, but most borrowers will end up paying all the interest they would have anyway on the fixed-rate loan.
The opportunity to lock in relatively low rates comes just in time for graduates caught in the economic slowdown, Frye said. “It’s not just about interest rates — they might be people who were caught in the economic downturn and need more money in their pocket.”
According to the U.S. Education Department, a borrower who repays a standard 10-year loan at the new rates will save $136 in interest for every $1,000 in loans outstanding, compared to the previous 8.19 percent rate. That means the average borrower, with $19,000 outstanding, would save $2,584 a year.
For professionals carrying large loans the savings can run much higher, according to the Student Loan Consolidation Center in Delmar, Calif. Doctors, engineers and other professionals often leave school with over $100,000 in total student debt.
Another benefit of consolidation is that it gives borrowers an option to shop around for better terms, without having to pay an origination fee. Unlike refinancing your mortgage, consolidating a student loan is free of fees — no matter whether the consolidation is under the Federal Direct program of FFEL.
For example, the Federal Direct program offers borrowers an up-front 0.8 percent rate reduction for on-time repayment. Private sector lenders may or may not offer similar discounts.
Under many circumstances, a graduate paying off FFEL loans can consolidate them with a Federal Direct consolidation loan, essentially switching programs.
In the past, consolidation loans have been more of a fallback for borrowers than an opportunity to save, Scherschel said.
“The original purpose of it was debt relief,” she said. With consolidation, “you can extend payments from 10 years to 30 years (and) lower monthly payment 45 percent.”
But stretching out the term of repayment can double or even triple the total interest costs on the loan, she added.
That’s just one of the cautions that grads and parents should be wary of.
Another is the status of special Perkins Loans, which can be erased for grads in certain jobs. For example, grads who teach in inner cities can have their Perkins debt canceled over five years. But once the Perkins Loan is rolled into a consolidation, that option vanishes.
The six-month grace period for repayment of student loans presents a special case for recent grads. They can benefit by locking in a lower rate that’s effective during the grace period.
It’s even possible to consolidate loans while still in school under the Federal Direct program, but there’s a big drawback. Instead of being deferred until after graduation, payments on the consolidation loan start to come due in six months. For many students, having to pay off loans while still in school cancels one of the Stafford program’s big advantages.
For graduates, there’s plenty of time to study the options. Unlike with home loans, there’s no rush to lock in now, since the current rate will remain in effect until next July 1. Lenders say one strategy would be to wait until next spring and decide whether to file a consolidation loan application six to eight weeks before July 1, to allow for processing time.
After all, rates might even sink further.