Making the Most of Loan Consolidation
Submitted by Wendy Hutchins, Account Executive, Sallie Mae Higher Ed Sales-South

Students with education loans issued under the Federal Family Education Loan Program (FFELP) no longer have to wait until they finish school to consolidate their Stafford loans. By exercising their right to request that these loans placed in a repayment status early, students can make their loans eligible for loan consolidation and lock in today’s current low interest rates.

Up until recently, only Direct Loan borrowers had exercised their option to consolidate student loans before graduation. Now the U.S. Department of Education has issued guidance on early repayment consolidation in a Dear Colleague Letter dated May 16, confirming what many lenders believed to be permissible under regulation. In pursuing early repayment consolidation, students can save hundreds, if not thousands, of dollars, based on today’s interest rates. Stafford loan interest rates are reset each year by the federal government and are determined by adding a set margin to 91-day T-bill rates at the end of the month of May. When the new interest rates go in effect on July 1, analysts predict they will likely be two full percentage points higher than they are today.

How it works
Students need to consider their options carefully and understand the consequences—pro and con—of any potential action they take. The bottom line is this: Students will decide whether they want a grace period or the opportunity to fix a low interest rate for the life of their loan. If students decide to pursue early repayment consolidation, they should begin the process by contacting their lender. They will need to move quickly, as the deadline to submit a signed consolidation application and receive today’s low interest rates is midnight, June 30, 2005. Many lenders, including Sallie Mae, offer online application forms to make the process as simple and easy as possible for borrowers.

The first step in the early repayment consolidation process is for borrowers to request their loans be placed in a repayment status. Once in a repayment status, the loans are eligible for consolidation. The second step for the borrowers is to request an in-school deferment on their loans based on their enrollment status.

Next, borrowers can request that their loans be consolidated using the deferment interest rate. For borrowers who apply before June 30, the consolidation loan interest rate may be as low as 2.875 percent (2.77 percent adjusted up to the nearest 0.125 percent). The Consolidation Loan is then entered into an in-school deferment based on the borrower’s enrollment status. The deferment relieves the borrower from having to make payments while still in school. But when borrowers elect early repayment, they forfeit their six-month grace period, meaning that their loans will become due as soon as they drop below a half-time status.

Interest rates on student loans are at their lowest levels ever. For many students, the option to take early repayment consolidation—and fix these low rates for the life of their loan—is an opportunity to save hundreds or even thousands of dollars in interest expense. As with any financial assessment, it’s best to be armed with as much information as possible and to know the facts so that the final decision is a sound one.