Dear Friends-

If you or someone you know is a college student or graduate with outstanding student loans, time is running out to lock in a low, permanent rate.

As of last summer, the interest rate on new Stafford loans was switched from a “variable” rate based on market conditions, to a “fixed” rate of 6.8 percent. The rate on PLUS loans (parental loans used to pay college expenses), which also used to vary, was fixed at 8.5 percent.

This means that students who were in college prior to fall 2006 probably have a mixture of both variable and fixed-rate loans.

It’s the interest rate on outstanding variable loans that is going up July 1st. And, if you do nothing, the rates on these older Stafford and PLUS loans will continue to fluctuate.* Although recent graduates have a 6-month “grace” period before they need to begin repayment, consolidating your variable loans before rates go up will save a significant amount of money in the long run.

You also have the right to request that your lender re-pay your existing loans until the end of your grace period. This is known as a “grace hold” and it’s not optional. If you ask for this, your lender must do it. This allows you to get the lower rate and keep your grace period.

“If you’re just coming out of school, you have a two-tier rate structure,” says Patricia Scherschel, vice president of loan consolidation for Sallie Mae, the government-backed student loan program.

Tier one is the rate you pay while you’re in school and during the 6-month grace period after you graduate. While this is currently 6.54 percent, it increases to 6.62 percent July 1st. If you’re a recent grad, when your grace period expires in the fall this rate will increase to 7.22 percent — unless you consolidate.

Consolidation means a lender pays off your existing loans and gives you a new loan for the total amount. The new loan will come with a new, fixed interest rate and generally a longer re-payment period, up to 30 years instead of ten. (Caution: If all you make is the minimum monthly payment, stretching out the term of your loan means you will ultimately end up paying more because the interest accumulates for a longer period of time. What you want to do is pay more than the schedule they give you.)

According to Scherschel, you can lock in a “significantly lower interest rate” by consolidating your variable rate student loans by July 1st.

Since the interest rate you get on a consolidation loan is based upon a weighted average of all your variable rate student loans, your rate might be different from a classmate’s. However, you can get a good idea of what this will be by visiting the web-based “Repayment Optimizer” at www.salliemae.com/repaymentoptimizer.

Shop around. You may be surprised how willing some lenders are to negotiate. Start by asking your current lender about the terms they can offer. If you used someone other than Sallie Mae you can instantly find out how their loan package compares by entering some basic information at www.salliemae.com/consolidation.

Don’t just consider the interest rate. If you sign up for electronic payments via a bank account, lenders, including Sallie Mae, typically immediately knock a quarter of a percent off your rate. Once you establish a record of making on-time monthly payments, many will reduce it a full one percent. So your total reduction could be 1.25 percent.

But with July 1st just a few days away, the most important factor to consider at this late date is how fast a lender can process your loan consolidation application. Since time is of the essence, submitting your paperwork online may make all the difference.

Scherschel says applications submitted via Sallie Mae’s Web site before midnight June 30th will qualify for the lower rates currently in effect. And you will get an instant confirmation emailed to you so you know that your application was received.

Hope this helps,
Gail

*The maximum interest rate on a Stafford loan is 8.25 percent; for a PLUS loan, it’s 9.0 percent.

If you have a question for Gail Buckner and the Your $ Matters column, send them to: yourmoneymatters@gmail.com, along with your name and phone number.