How to save thousands on student loans
Loan rates will climb nearly 2 percentage points come July. So it may pay to consolidate now.
By Jeanne Sahadi, senior writer

NEW YORK ( - If you've borrowed money from Uncle Sam to finance your education or your child's, you might be able to save yourself thousands of dollars.

The trick: consolidating your federally guaranteed, variable-rate loans between now and June 30.

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If you consolidate before July 1, here's how much you can reduce your loan payments per month and in interest over the life of your loan.
Loan BalanceSavings
Stafford $20k$19/mo or $2,275 in interest
Stafford $100k$95/mo or $11,391 in interest
PLUS $20k$20/mo or $2,322 in interest
PLUS $100k$97/mo or $11,614 in interest

Here's why: your payments will go up on July 1 due to an increase in loan rates. Those rates are reset every year based on the yield on 3-month Treasury bills as determined by the last T-bill auction in May, which occurred Tuesday.

That yield was 4.84 percent, up 1.84 percentage points from the end of May last year.

Hence, the repayment rate on the federal loans for students known as Stafford loans will rise to about 7.14 percent from 5.3 percent currently.

If you start repaying your loans while you're still in school or up to six months after graduation, known as the grace period, you get a lower rate. That rate will rise to 6.54 percent from 4.7 percent.

Meanwhile, the rate on student loans for parents, known as PLUS loans, will rise to roughly 7.94 percent from 6.1 percent.

This year's rate increase is second only to the record 1.93 percentage point increase in 2005, said Mark Kantrowitz, founder of and author of the upcoming book "FastWeb's College Gold."

How much you could save

When you consolidate, you roll all your loans into one and lock in a single rate on the money you owe.

If you consolidate your loans now, you can get a rate of 5.38 percent for regular student loan repayment, and 4.75 percent if you're still in school or in the grace period. That applies to Stafford loans obtained after June 1998.

Come July 1, those rates will jump to 7.25 percent and 6.625 percent, respectively.

For PLUS loans, the consolidated rate, currently 6.125 percent, will rise to 8.00 percent in July.

Here's what that means in dollars:

  • Say you have $20,000 in 10-year variable rate Stafford or PLUS loans. If you consolidate before July 1, you could save roughly $20 a month in payments and about $2,300 in interest over the life of your loan.
  • If you have $100,000 in loans, as many medical students do, multiply those savings by 5. You'd save close to $100 a month, or about $11,500 in interest over the life of the loan.

Act before June 30

By law, you may not consolidate the same loans twice in that you may not lock in a new rate on loans consolidated in years past. You may consolidate, however, any loans not included in a past consolidation.

If you do choose to consolidate, Kantrowitz said, here are a few things to keep in mind:

  • You must consolidate by June 30 to get the best rates.
  • You may consolidate to get a better rate even if you just have one loan.
  • If all your loans are from one lender, you must consolidate with that lender.
  • If you have loans from more than one lender, ask your school's financial aid office which lenders offer the best consolidation deals in terms of discounts and customer service.

Opt for a lender that offers to knock at least a quarter point off your consolidated rate if you agree to electronically transfer your payments. This type of short-term incentive is better than one that takes a few years to satisfy - for example, a discount if you make 36 consecutive on-time payments, something that's typically difficult for most new graduates.

  • When you consolidate, don't include any Perkins loans you may have. It's already a fixed-rate loan, so there's no benefit from consolidating it and you may, in fact, lose some of the benefits such as certain loan forgiveness provisions
  • If you're married and both you and your spouse have student loans, don't consolidate them into one loan. If you divorce, you'll both be on the hook for repayment of the full amount. If your split is acrimonious and one of you reneges on your half of the bill, the other person will be held accountable.

To see how much money you can save by consolidating, use's loan consolidation calculator.


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