Student Borrowers Must Consolidate Now

If you still have outstanding student loans, Congress is about to sock you with much higher interest rates as part of a plan to close the budget deficit gap.

Several proposals now before the House and Senate tinker with the formulas for calculating student loan interest, and with graduates' ability to refinance their loans and lock in current low rates. If you take action now, you may be able to escape this irrational punishment. And you might want to contact your legislators to protest. But first you must understand the process.

Last week I gave you tips on refinancing your mortgage. If rates come down, you can refinance again. But college students and grads that hold $300 billion of outstanding student loans don't get that same privilege of refinancing at lower rates. Until recently, you could only consolidate your student loans once in your lifetime to lock in a fixed rate. That meant many grads who consolidated five or six years ago were stuck paying rates as high as 9% for the life of their loan.

Rates on student loans change yearly, based on the rate of 91-day Treasury bills set at the last weekly auction in May. New rates go into effect each July 1. Students who consolidate their loans within six months of graduation get an extra rate break. Many lenders even cut rates an extra quarter of a percent if you agree to have loan payments made by automatic deduction from your checking account.

The bottom line: Students who consolidated their loans by June 30 of this year locked in rates as low as 2.875% for the life of their loan. The current consolidation rate is 4.75%. As the general level of interest rates dropped in recent years, many students elected to use their one-time consolidation opportunity to lock in the low rates. But those who consolidated in previous years were stuck paying those higher rates from the time they consolidated.