Ah, to be young, fresh out of college, your whole life ahead of you. ...
If it weren't for that mountain of college debt - typically about $20,000 for new graduates - everything would be perfect. To make matters worse, interest on federal variable-rate loans is about to leap.
Fortunately, borrowers have a great option: Act before July 1 and lock in your debts at today's rock-bottom rates. Wait until later and repaying the loans could cost thousands more.
On July 1, rates on all federal student loans will rise by nearly 2 percentage points. Rates on Stafford loans on which payments already have begun, for instance, will jump from 3.37 percent to 5.3 percent. (The rate on a Stafford loan adjusts every July 1 until the balance is paid off.)
But by refinancing by July 1, the borrower can lock in with a new fixed-rate loan at 3.375 percent. Do it later and the rate will be 5.375 percent.
In this case, refinancing with a "consolidation" loan is a slam dunk. But there are other types of loans, and many students and parents have more than one type, at a variety of rates. So how do you fight through this mess to the best result?
Here are a few things to keep in mind:
¢ Reducing interest rates is almost always good. A typical student with $20,500 in debt could save $2,842 over a 10-year repayment period by consolidating before July 1, according to the College Loan Corp.
¢ Don't extend the repayment term. If you had a loan with five years to go, you could cut your payment by switching to a 10- to 30-year loan. But the added years of interest payments could cost you more in the long run. So, as a rule of thumb, you should not replace one loan with another that has a longer repayment period.
Of course, there are exceptions - if you're having a hard time making payments, as many new graduates do, for example. Just be careful to consider the full cost of the loan over the years it will take to pay off.
¢ Look at real dollars. It's all too easy to get bogged down over interest rates. It's the money that matters. If your loan is fairly small and you'll pay it off in just a few years, it may not be worth the trouble to replace it with a new loan, even if the interest rate is lower.
¢ Don't worry about the grace period. Borrowers get a six-month grace period after graduation before they have to start payments. And if you consolidate while you're still in school - an option recently adopted - you'll lose that grace period after graduation.
Even so, the long-term savings from consolidating before July 1 probably will be worth it. Stafford loans consolidated before July 1 by people still in school, in the grace period or in a payment-deferment period, will carry a rock-bottom rate of 2.875 percent. That will jump to 4.75 percent July 1. You may never again have the chance to borrow so cheaply.
¢ Make a long-term plan for your loans. Do you expect to make minimum payments for the full term of the loan, or to pay it off as quickly as possible? The longer you'll keep it, the more sense it makes to consolidate.
Generally, it's smart to clear debts as soon as possible, as that can save you lots of interest charges. But using a wad of cash for this means you can't use it for something else, so you have to weigh the alternatives.
It would be silly, for example, to pay off a loan charging only 3 percent interest if you could invest the money at 6 percent. And it could make sense to hold your cash for another use, such as a down payment on a house.
Interest rates on many student loans are so low that it often does not make sense to pay these debts off early. Hence, consolidating at a lower rate is a good option.
Do your homework. Start with the Department of Education at (800) 557-7392.