Loan Consolidation: Is it Right for Your Students and Parents?
Submitted by Sallie Mae

As students across the country prepare for graduation, their first job and life after college, many are also completing some final financial homework by investigating how to consolidate their education loans to take advantage of historically low interest rates. Current rates hover in the 2.875 percent to 3.5 percent range when students consolidate recent loans, and they can lock in this low rate for up to 30 years depending on their loan balance. In the last two years, hundreds of thousands of borrowers nationwide have taken advantage of these low rates and consolidated their loans. Although there are many sound financial reasons to consider consolidation, Annita Huff, Director of Financial Aid at Washburn University in Topeka, KS, cautions students to get all the facts before they make their decision. “As a smart consumer, you have to gather all the information possible. You have to study your own finances, make choices and decide what’s best for your situation,” Huff said.

One of the main advantages to loan consolidation: Borrowers can lower their monthly payments. For Lauren Gale, a May 2003 graduate of Notre Dame University who now works as a consultant for the software company Epic Systems, a lower monthly payment has given her the opportunity to fund a Roth IRA. Last fall, near the end of her six month, post-graduation grace period, Gale consolidated $17,000 in student loans. Her monthly payment is now $120 instead of $170. And, even though she has 15 years to pay off the loan instead of the standard 10 years, she plans to prepay so she can pay off her loan early. “The interest rate was so low I couldn’t pass this up,” she said. “Plus it’s convenient. I make one simple payment – it’s easy to keep track of one loan instead of six or eight loans.” Education loan interest rates are variable and change each July. In the last six years, the in-grace rates on Federal Stafford Loans have ranged from 7.59 percent to 2.82 percent. By consolidating recent loans – those taken out since July 1, 1998 – borrowers can lock in a fixed rate of 2.875 to 3.5 percent for the entire 10- to 30-year period, reduce their monthly payment and extend the amount of time they have to pay off their loan. There are no fees or credit checks. And, because borrowers make only one loan payment, they are more likely to pay on time and qualify for lenders’ borrower benefit programs, which can reduce their payment even more. Huff said students must understand that consolidating can have some potential drawbacks:

In addition, if borrowers are married and considering jointly consolidating their education loans, they should understand that both the husband and wife are liable for the entire amount of the Federal Consolidation Loan, and both must meet requirements to qualify for a deferment. Therefore, for most couples, consolidation may not be the best option. It should be noted, however, that a husband and wife may still consolidate individually if they desire. For borrowers in Gale’s position, however, loan consolidation can make perfect sense. “It was really ideal for me. I would encourage students today to find out everything they can about it.”

Student borrowers aren’t the only ones saving money on their monthly education loan payments by consolidating their student loans. Parents can consolidate their Federal PLUS Loans and lock in a rate as low as 4.25 percent. Regulations governing the Federal Student Loan Program allow parents to consolidate their PLUS loans after they are fully disbursed, generally in January. Parents can take advantage of loan consolidation even if they have only one loan. If they continue to take out Federal PLUS Loans for the remaining years their children are enrolled in college, they can choose to consolidate their PLUS loans each year. The PLUS rate is variable and changes each July 1st. The rate cannot exceed 9 percent and has fluctuated over the past six years from a high of 8.99 percent to as low as the current 4.22 percent (4.17 percent as of July 1st, 2004). Parents have 10 years to repay PLUS loans. When parents consolidate recent Federal PLUS loans, they can lock in a rate of 4.25 percent and extend their repayment term up to 30 years, depending on the level of education debt they have. Locking in a low fixed rate can save a substantial amount of money. The average interest rate for Federal PLUS Loans over the last six years is 6.81 percent. When parents consolidate and take the same standard 10 years to repay their loan, they can save the following amounts by having a 4.25 percent interest rate instead of the average 6.81 percent interest rate:

In addition, there are no origination or application fees, and most lenders do not require a credit check. Although parents cannot consolidate their PLUS loans with their children’s Stafford loans, parents can consolidate their own Stafford loans with their PLUS loans in order to make one easy education loan payment.

For more information on Sallie Mae’s loan consolidation program and benefits, please contact your Sallie Mae Higher Ed Representative.