Mellody Hobson: Consolidating Student Loans
June 2, 2005 -- -- Student loan rates will jump 2 percent on July 1, so the time to consolidate is now!
June 30 marks the deadline for college graduates to lock in the lowest student loan interest rates on record. According to FinAid, two-thirds of undergraduate students graduate with some debt. In fact, the average federal student loan debt is about $17,000 (Stafford and Perkins Loans), and $20,000 when PLUS Loans are included.
What is consolidation?
Loan consolidation refers to combining multiple educational loans into a single, larger loan which a student pays off each month.
Who should you call?
Before you consolidate, you must take inventory of all of your outstanding loans. The best way to do this is to log on to the National Student Clearinghouse Web site (www.nslc.org). You can consolidate your loans at a bank or credit union that is a member of the Federal Family Education Loan Program.
Alternately, you can go directly to the U.S. Department of Education (www.loanconsolidation.ed.gov) or call 1-800-557-7395. If your loans are with a single lender, you must consolidate with that bank or credit union. What you should not do is respond to phone solicitations urging you to consolidate your loans. Keep in mind, there are never any fees associated with consolidation, so if the lender requires you to pay an application or credit check fee, find another lender.
What are the rules of consolidation?
Most federal loans can be consolidated. Students can consolidate while still in school, during the six-month grace period immediately following graduation or during the repayment period. Keep in mind, interest rates are lower when you consolidate in-school or during your grace period.
To qualify while still in school, a student needs to request early repayment status from the lender. Doing so locks in the lower rate but also wipes out your future grace period. However, students can still defer payments by then requesting an in-school deferment until after graduation.
Here are a few stipulations to keep in mind:
What does this mean in real dollars for a graduate?
If you are a student with a $20,000 Stafford loan and consolidate before June 30 at 2.88 percent, you will pay about $110 a month, including $6,300 in interest over 20 years. However, if you choose to consolidate your $20,000 loan after June 30th, you will likely pay 5.38 percent, increasing your monthly payment to $136 and doubling the amount of interest you pay to $12,700 over the life of your loan!
Are there other advantages to consolidating?
Not only will consolidating allow you to lock in the lowest rate in history, it also opens the door to other savings opportunities. For example, if you enroll in an automatic debit plan, you could decrease your interest rate by another quarter-point. Additionally, after 36 months of on-time payments, some lenders will slash your interest payment by up to another whole percentage point. Finally, consolidation loans do not carry any pre-payment penalties -- so go ahead and pay more toward your debt -- just be sure to write "principal payment" on the memo line of your check.
Are there any pitfalls to consolidation?
Yes. Although monthly payments are lowered because the life of the loan is extended, keep in mind, you could pay considerably more in interest over the life of the longer loan. Additionally, when you consolidate before July 1 you forfeit your six-month grace period which means after graduation, you must start repayment immediately. For many graduates still in the job search, this can be a frightening reality. However, you may qualify for an economic hardship deferment which enables you to postpone payments for a period of time. Likewise, consider contacting your lender directly to explore options.
Mellody Hobson, president of Ariel Capital Management (arielmutualfunds.com) in Chicago, is Good Morning America's personal finance expert. Ariel associates Matthew Yale and Aimee Daley contributed to this report.