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Student loans: Consider consolidation
Rate hikes likely are on tap, and rules governing consolidation may change, making it less appealing
April 25, 2005: 11:48 AM EDT
By Jeanne Sahadi, CNN/Money senior writer

NEW YORK (CNN/Money) All good things usually come to an end. So, come July, don't be surprised if the rock-bottom rates on your federally guaranteed, variable-rate student loans go up.

The hike may be as much as 2- to 2.5 percentage points, predicts Mark Kantrowitz, founder of

That will mean higher payments for anyone with Stafford loans and for parents who have taken out PLUS loans -- and is just one reason you might consider consolidating such loans before the rates change on July 1.

Another reason is the potential change in the rules governing consolidation, which President Bush has proposed in his 2006 budget.

The benefits of consolidating now

When you consolidate in a low-rate environment, you roll all your loans into one and lock in one rate on the money you owe. That rate is a weighted average of all your loans rounded up to the nearest eighth of a percentage point.

Right now, if all your loans are Stafford loans obtained after June 1998, the consolidated rates are 2.88 percent if you're still in school and 3.38 percent if you've graduated and have started repaying them. Kantrowitz predicts that come July 1 of this year those rates could go up to 4.7 percent and 5.3 percent, respectively.

For PLUS loans, the consolidated rate today is 4.75 percent. Kantrowitz thinks that may go up to 6.13 percent in July.

Short-term rates have been on the rise for more than a year. Since May 2004, the yield on the 91-day Treasury bill (to which Stafford and PLUS loan rates are tied) has moved up about 1.7 percentage points.

And it's likely to go up more in the next several weeks, Kantrowitz said, since the Federal Open Market Committee is expected to raise short-term rates again.

"It's a no-brainer at this point. You want to consolidate before rates rise," Kantrowitz said.

Keep an eye on Washington

You also might consider consolidating soon because lawmakers may change the rules governing federal student loans. Two of those potential changes would make loan consolidation less advantageous for borrowers.

President Bush has proposed eliminating the fixed interest rate in consolidation, and replacing it with a variable rate.

That would mean your rates would change every year, although they couldn't exceed 6.8 percent.

With variable rates, there would be no rounding up to the nearest eighth of a percentage point in determining the weighted average as is done now. But Bush also has proposed charging a 1 percent origination fee to consolidate loans, whereas right now there is none.

Under current law, if you've already consolidated your student loans once you can't do it again. If Bush's proposals are approved, that will no longer be the case. But for now, you're out of the running.

No need to rush

Your lender may allow you to apply as late as June 30 for consolidation at today's rates.

But if you don't want to cut it that close, many lenders will let you put together the paperwork now and they'll hold it until after the last auction in May of the 91-day Treasury bill, which will determine the direction of the student loan rate change in July.

If rates are slated to go up, the lender will go ahead with your consolidation before the July 1 rate change. In the unlikely event that rates go down, the lender will process the consolidation after July 1.

Should you consolidate, keep in mind:

  • If all your loans are with one lender, you have to consolidate with that lender. Bush has proposed eliminating the single-holder rule, but for now it's still in place.
  • If you have loans with 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. Kantrowitz's advice: Opt for a lender who at least offers to knock 0.25 percent off your consolidated rate if you agree to electronically transfer your payments.
  • When you consolidate, don't include any Perkins loans you may have, Kantrowitz said. It's already a fixed rate loan, so you'll derive no financial 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, Kantrowitz suggests that you do not consolidate them together into one loan. In the event you divorce, you both will 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 still be held accountable.
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