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Consolidating Student Loans Still A Good Idea Staff - Mortgage Lenders Plus.com

When the new student loan rates became effective on July 1, interest on new Federal Stafford Loans increased to a permanent rate of 6.8 percent. Existing Stafford loans went up from 5.3 percent to a 7.14 percent fixed rate. Lawmakers also raised interest rates on Parent Loans for Undergraduate Students, federal loans parents can take out to help finance their children's education. The PLUS loan increased from 6.1 percent to a fixed rate of nearly 8 percent for existing loans. The rate is 8.5 percent on new PLUS loans.

As a result, students and parents will pay thousands of dollars more in student loan interest rates, according to a report from the Campaign for America's Future, a citizens' advocacy group in Washington, D.C. A typical American undergraduate with $17,500 of student-loan debt will shell out $2,000 more in interest payments. The rate hike on PLUS loans will cost the average parent an additional $3,000 to $3,953. In all, Congress slashed the federal student-loan program by $12.7 billion over the next five years.

The student loan rate increase comes at a time when college tuition costs are also on the rise. During the 2005-'06 school year, the average tuition at a four-year private school was $21,235, an increase of 5.9 percent from the previous year, according to College Board estimates. Public university students paid an average tuition of $5,491, up 7.1 percent from the year before.

"The student loan rate that is in place today is still among the lowest," said Martha Holler, spokeswoman for Sallie Mae in Reston. "It might have gone up anyway based on variable interest rates, but now it can't go up past the fixed rate.” Sallie Mae is the leading student loan provider in the country. It was founded in 1972 as a government agency, and completed privatization in 2004.

To help manage their debt, students can pursue student loan consolidation. Consolidation allows borrowers to combine loans into one single package and lock in a fixed rate. "Consolidation streamlines that process," Holler said. "Your other loans are paid off, a new loan is created. One payment, one place to send it."

With consolidation, Students also can stretch out their loan payments over up to 30 years, which can result in lower monthly minimum payments-but increases their overall interest payments. Student loan consolidation was popular when student loan rates reached historical lows, under 3 percent on some loans in 2004. Borrowers hurried to consolidate their loans and lock in the low rate. However with the fixed federal interest rate, consolidating could become less popular, but incentives are still out there.

Sallie Mae promotes a 0.25 percent interest rate deduction when a student signs up for direct debt and a 1 percent cut after the student makes on-time payments for 36 months. To be sure of the exact cost savings from student loan consolidation, Holler recommends borrowers look around. "You should ask a lender to quantify how much you will save," she said. "Then you can compare when you shop."