All good things come to an end, and that might be true in July, when historically low interest rates on student loans are readjusted. If current trends continue...
All good things come to an end, and that might be true in July, when historically low interest rates on student loans are readjusted.
If current trends continue, new rates on federal student loans could rise nearly 2 percentage points, some lenders say — the first increase in five years.
For college seniors about to graduate or borrowers repaying federal loans, there might be no better time to consolidate education debt. Doing so by June 30 can lock in today’s low rates for the life of the loan.
Each July, the variable rates on federal student loans are adjusted, based on the three-month Treasury bill auction in late May. Rates today are the lowest in the program’s 40-year history.
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Borrowers can switch to fixed rate by consolidating loans.
Because of the formula used in consolidation, the fixed rate can differ among borrowers and will be slightly higher than the variable rate. Essentially, the formula uses a weighted average of a borrower’s existing loan rates and rounds it up to the nearest one-eighth of 1 percent.
By consolidating now, borrowers repaying newer loans could secure a fixed rate of 3.375 percent. New graduates could receive a fixed rate of 2.875 percent by consolidating during the grace period, the six months between graduation and when repayment kicks in.
Depending on the amount of debt, a borrower can extend the life of the loan from 10 years to as much as 30 years.
Consolidation is not just for students. Parents with a Parent Loan for Undergraduate Students (PLUS) may consolidate debt, although at a higher rate than that of students.
Low rates aren’t the only reason to consider consolidating. Legislation pending in Congress would require that future consolidation loans be at a variable rate, a move that would save the government money but cost borrowers more if rates rose.
Take a soon-to-be graduate with $20,500 in loans, the average amount of debt consolidated last year, according to College Loan. Assuming the rate on loans goes up 2 percentage points in July and stays at that level for 10 years, a new graduate would save about $2,930 by consolidating during the grace period.
Those in repayment would save about $2,360 by consolidating before July.
If all your loans come from one source, first you must seek consolidation from that lender. If you borrowed from several, you’re free to look around. Plenty of lenders are competing for consolidation business, and many offer discounts.