Most people are predicting that interest rates on student loans will go up on July 1. It might make sense for people with these loans to consolidate before the rate increase. I still have a small portion left over from my undergraduate degree but I’ve also begun accumulating a balance from my graduate degree, 90% of which is reimbursed by my employer. Thus, I am thinking about this topic and weighing my options.
According to CNN Money, rates may go up as much as 2.5 percentage points. I’d like to avoid that if possible.
One solution is consolidation of the student loans. There are advantages and disadvantages to consider, however.
First the advantages:
* Paperwork simplification. This isn’t really a big deal to me since I do everything electronically.
* Lock in low rates. Presumably, rates will go up. You can work with the loan consolidator to wait until the night before July 1 and if the rates end up going down, you can consolidate at the lower rate.
The disadvantages:
* No grace period. If the borrower is still in school when the consolidation occurs, the grace period is forfeited and the payments become due immediately. I’m fine with this situation as I’m going to school part time while working full time. Plus, as my company reimburses me, there will be very little I’ll actually have to pay.
* Only one consolidation allowed. Once the loans are consolidated, you miss any future opportunity to consolidate again at a lower rate. In the current environment, I don’t think raets will be lower in the near future.
* Less benefits. Many lenders offer incentives such as several percentage points off interest for making on-time payments or getting decent grades. Consolidation may not offer such incentives.
I’m certain that in my position, I should consolidate at the low rate now and pay off the student loans as quickly as possible while still maintaining a safety cushion of emergency cash.
Updated September 28, 2007 and originally published April 25, 2005.
Another thing I’ve discovered that’s a con is that if you’re in school still (say grad school) you can’t consolidate all loans together (undergrad and grad). Plus, every offer I’ve received is only for loan amounts greater than $10,000, which all of mine aren’t. Just gonna hope the increase on interest rates isn’t huge–at least not for another year!
I may be misunderstanding your comment on benefits, but many loan consolidation programs for offer benefits.
The best one I have seen, http://www.uheaa.org, (NFI) offers 1.25% off for electronic deduction and another 1% off after 48 on time payments (and, as I understand it, you can reach the 48 payments earlier by making larger payments).
I wish I could take advantage of this offer, but as I am still in law school, I cannot. Other programs do allow in school consolidation so I will be consolidating under a program .25% for electronic deduction and 1.0% reduction after 36 months.
Also, I am fairly certain that at least some loan consolidation companies allow grace periods as well as including deferment and forebearance options found under the federal loan programs.
I had a real problem with my student loan debt some years ago. I can write from experience: consolidate now while the interest rates are still low. It’s a once in a lifetime opportunity to save a lot of money in the long term.
I’ve posted an update detailing tonight’s experience with consolidation.