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Archive for Sunday, May 28, 2006

Consider consolidation loans to pay off student debt

May 28, 2006

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Got a pile of student loans to pay off?

Borrowers with the common Stafford and Plus student loans are likely to see their interest rates jump by about 2 percentage points later this week, adding thousands to the cost of repaying a typical loan.

So put July 1 on your calendar. That's the deadline for taking out a new Federal Consolidation Loan to refinance that older, variable-rate debt with a new fixed-rate loan currently charging as little as 4.5 percent. This rate, too, is likely to rise July 1.

One of the most common student loans, the Stafford Loan, carries a variable rate that adjusts every July 1 by adding 2.3 percentage points to the yield on three-month Treasury bills. For the past year, these loans have charged 5.3 percent.

Because the Federal Reserve has pushed short-term interest rates up during the past year, Staffords are expected to charge around 7.3 percent for the 12 months beginning July 1.

Another common loan, the Parent Loan for Undergraduate Students, or PLUS, also carries a variable rate that adjusts every July 1. It currently charges 6.1 percent and is also expected to rise by about 2 points.

Both types of loans, and many others, can be replaced with a single fixed-rate Federal Consolidation Loan. Rates on these vary, depending on the loan or loans being replaced, but for many the charge is only 4.5 percent. The consolidation process is similar to refinancing a home mortgage - using a new loan to pay off older ones with less desirable terms.

The College Loan Corp., one of many companies that helps borrowers refinance, estimates the typical borrower with $20,000 in outstanding student loans can save $3,000 or more by consolidating before July 1.

Just about any federally backed student loan qualifies for consolidation, but the process cannot be used for private loans, such as those from banks, credit unions, savings and loans, parents or other individuals.

If you have some spare cash, think about simply paying off your student loans.

In past years, this often didn't make sense, since many student loans carried rock-bottom interest rates. A year ago, for example, consolidation loans were charging a mere 2.875 percent. That was so low it made sense to consolidate and try to invest spare cash elsewhere for a higher return.

But with the consolidation rate at 4.5 percent it may make sense to pay loans down. Any money spent to reduce debt would in effect be earning 4.5 percent, which competes with what you could earn in a safe investment such as a certificate of deposit at a bank.

So don't waste time. July 1 is not that far off. I'd start with a couple of Web sites: www.salliemae.com, and www.collegeloan.com. But don't stop there; many lenders handle consolidation loans. Just type "federal consolidation loan" in your search engine.

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