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Consider Consolidating Loans Soon

Kimberly Lankford

My undergrad loans were consolidated in 2001 at 8.6%. I have new loans for graduate school -- about $6,000. Should I reconsolidate now?



I currently have my undergrad loans in deferment. They were consolidated in 2001 at 8.6%. I have new loans for graduate school -- about $6,000. Should I reconsolidate now, or should I wait until I'm finished with grad school?

You're in a good position. People generally can't reconsolidate their student loans after they've done it once, which has been frustrating to people like you who consolidated several years ago then could do nothing while rates continued to fall over the next few years.

But because you have new loans, you can consolidate again. When you consolidate, you lock in a weighted average of the current rates on all your loans. So the low rate on your new loans (as low as 4.7% if you're still in the six-month grace period after graduation) will help bring down the rate on your older loans.

Rolling the two loans together, however, will increase the rate on your new loans. So it's a good deal only if you have more money in the old loans than the new loans.

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There's another good reason to consider consolidating soon: Rates on Stafford loans change each July 1 based on the 91-day Treasury-bill yield set the last Thursday in May. The T-bill rate is expected to rise, so it pays to consolidate your loans and lock in the lower rate. The current rate on Stafford loans is 5.3%, or you may be paying as little as 4.7% if you're still in the grace period.

If you don't want to worry about predicting the movement of interest rates, you can wait to consolidate until June, when you'll know for sure what next year's rates will be but still will have a month to lock in the current rates before they rise. If you're nearing the end of the grace period, however, be sure to make your move before those rates rise.

It's also a good idea to consider consolidating before July 1, 2006, because the student loan rules are about to go through big changes. After that date, students no longer can consolidate Stafford loans while they're still in school. The rates also will change significantly for new borrowers -- anyone who takes out a new Stafford loan after July 1, 2006, will now have to pay a fixed rate of 6.8%, no matter what happens to the T-bill rate. PLUS loans for parent borrowers will be fixed at 8.5%, up from the current 6.1%.

This change shouldn't affect you, though. The rates for those who currently have a Stafford loan will continue to change every July 1 based on the T-bill rate, unless they consolidate and lock in that rate.

For more information about your student loan choices, see Student Loans 101.

For more information on the new rules for student loan rates, see Last Chance to Lock in. See Time to Repay Student Loans for more information about your payment-plan choices.

Got a question? Ask Kim at askkim@kiplinger.com.



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