Rock Bottom

The end is near for record-low student-loan rates. Consolidate now or pay more later.

By Kristin W. Davis

From Kiplinger's Personal Finance magazine, May 2005

The class of '05 has it good. This spring's college graduates are enjoying the lowest student-loan interest rates on record. If you act quickly, you can lock in those low rates for as long as it takes to repay your Stafford or PLUS loans. But miss the June 30 deadline for consolidating loans at current rates and you could wind up paying twice as much interest on your debt.

Stephanie Seek took advantage of this once-in-a-lifetime opportunity to lock in a 2.88% rate on $50,000 worth of Stafford loans. A third-year medical student at Georgetown University, she will probably borrow another $50,000 before she finishes. But in the 30 years allowed for repayment, she'll save more than $21,000 in interest on the first $50,000. Consolidation is "a wonderful money-management tool," says Seek, who is taking a year off from her studies to work as the legislative affairs director for the American Medical Student Association.

Rates are poised to jump as much as two percentage points this July 1 on variable-rate Stafford loans for students and PLUS loans for parents. Currently, the rate for Stafford borrowers is only 2.77% while in school and during a six-month grace period after graduation, then 3.37% until the loan is repaid. PLUS-loan borrowers currently pay 4.17%.

But students and parents who consolidate their loans before the rates rise can secure the current low rates for good. And because spring graduates who consolidate will be locking in during their six-month grace period, they'll get the lower grace-period rate rather than the regular repayment rate. During her year off, Seek was able to take advantage of the grace-period rate, too. (Because consolidation rates are rounded up to the nearest one-eighth percentage point, the actual consolidation rates are 2.88% for those who consolidate Stafford loans during their grace period, 3.38% on Staffords consolidated after the grace period and 4.25% on PLUS loans.)

How much money might consolidation save you? Consolidate a $20,000 Stafford loan at 2.88% and you'll pay $110 per month, including about $6,300 in interest over 20 years. A student who misses the boat and consolidates after June 30 and after his or her grace period ends would pay 5.38% if rates rose two percentage points. That would double the interest cost, to about $12,700. A med- or law-school student with $125,000 in debt could see the cost of borrowing rise from about $61,700 in interest to about $127,000.

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