GETTING PERSONAL: Student Loan Consolidation Good Option

NEW YORK (Dow Jones)--This could be the right time to consolidate student loans.

A number of programs and interest rates change after July 1, offering a chance to lower costs and get better repayment options. That's good news for students, who are graduating with on average about $23,000 in debt, and of course for parents still supporting them.

Similar to refinancing, consolidating of student's federal loans can be done for no fee. It's also a good opportunity for advisers to discuss college costs with families. The financial crisis and tighter credit have left even high networth investors less confident about college savings.

If someone consolidates during the grace period - which is typically six months after graduation - the Stafford loan rate could drop to 1.88% from 3.61%. Someone already repaying loans could see the rate drop to 2.4% from 4.21%. The PLUS loans rate could drop from 5.01% to 3.28%, says Mark Kantrowitz, publisher of FinAid, a Website that tracks the college financial aid industry. Consolidation, he says, locks in the lower rates beyond the coming year.

"These rates are historically low rates, and we are unlikely to ever see rates this low again," he says.

Until July 2006, interest rates on federal students were at variable rates that could potentially climb to 8.25% for Stafford Loans and 9% for Plus Loans. The consolidated interest rate is a weighted average of the interest rates on the loans at the time of consolidation, rounded up to the nearest one-eighth of a percentage point. It cannot exceed 8.25%.

After 2006, the rates became fixed. The unsubsidized Stafford loans are now 6.8%. The subsidized Stafford loan is decreasing each year from 6.8% to 3.4%. (It is scheduled to return to the 6.8% rate if Congress does not act). The Plus Loans are now fixed rates at 8.5% for FFEL PLUS Loans or 7.9% for Direct PLUS Loans.

Another benefit to consolidation is that it is a requirement for some deferred repayment plans. Borrowers typically have from 10 to 25 years to repay loans, depending on the repayment plans they choose.

Extending payments may ease monthly expenses in the short term, but it could add significantly to the cost of the loan.

For example, repaying $230 a month at the Stafford rate of 6.8% will add $7,619 in interest to a $20,000 loan repaid over 10 years, says Kantrowitz. In contrast, extending that to 20 years with payments of $153 a month would add $16,640 to the $20,000 loan for $36,640.

Another option for grads after July 1, is a new income-based repayment plan. The program doesn't require consolidation, but it caps monthly payments at a certain percentage of the borrower's income.

"It's actually a very good plan for people experiencing financial difficulties," says Kantrowitz. "It's better for you than a forbearance."

Only a few companies still consolidate private loans. That's worth considering if the borrower's credit score has significantly improved - say more than 100 points - and may enable them to get a better interest rate.

Another potential benefit to consolidating a private loan is that it could enable someone to remove a co-signer such as a parent or relative from potential liability. This typically requires regular payments of 24 to 48 months.

(Jilian Mincer is a Getting Personal columnist who writes about personal finance; she covers topics including pensions, insurance, and college and retirement savings. She can be reached at 212-416-2239 or by e-mail at jilian.mincer@dowjones.com.)

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By Jilian Mincer
A DOW JONES NEWSWIRES COLUMN