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Student Loan Steps to Take

Loan rates will jump July 1. Refinancing now can save you a small fortune in interest costs.

As I predicted in April, student loan rates will indeed increase dramatically on July 1.

Based on the last Treasury bill auction in May, rates on Stafford loans for those in school, in grace or in deferment periods will jump to 6.54% from 4.7%. Rates for Stafford loans already in repayment will rise to 7.14% from 5.3%. And rates on PLUS loans (for parents) will jump to 7.94% from 6.1%.

Let me make it perfectly clear:

If you have a student loan and have not consolidated and locked in current low rates, you must do it now -- today.

This advice applies to anyone with outstanding loans. That includes current students, even though they may take out other loans in the future.

In order to lock in the current lower rates, you must have a "substantially completed" loan-consolidation application on file by midnight, June 30. When you consolidate your loan, the rate will be a weighted average of your existing loans. Current students could potentially lock in a consolidation rate as low as 4.75%, compared with a rate of 6.625% after July 1. Older loans may result in a higher consolidated rate.

A special note for student borrowers who are still in school: This will be the last opportunity to consolidate existing loans while you're in school. Changes in the law mean that all future consolidations must be done after graduation.

For more grist on these changes, read my

earlier column on the subject. Then get moving on consolidating! Here's my attempt to answer some questions on the process that I'm guessing will arise.

Where do I consolidate?

If you have only one lender, you must consolidate with that lender. If you have loans from different lenders, you can consolidate with any lender approved by the Department of Education.

How do I compare?

By law, all lenders and consolidators must charge the same rate, and may not charge additional fees. But many lenders do offer additional special deals.

For example, Sallie Mae, a private company that is the largest student loan lender and consolidator, will shave one-quarter of a percent off your loan rate if you agree to have your monthly payments directly debited from your checking account. Many other lenders offer a similar deal.

And many lenders will drop your interest rate by a full percentage point after you've paid your loan on time for 36 months. You'll want to find a lender that offers these benefits.

Is there anything to watch out for?

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Glad you asked (or that I did)! Yes, you need to watch out for several key issues when choosing a place to consolidate your loan

Make sure your loan is eligible. Some lenders will not consolidate loans of less than $5,000 and others have maximum consolidation limits.

Make sure the lender is eligible. The lender must be approved by the Department of Education and, before applying, confirm that it can consolidate loans from all of your original lenders. (Remember, if you had only one lender, you must consolidate with that lender.)

Ask about minimums or caps on the discount deals. A typical requirement is at least a $7,500 loan balance for automatic debit, and a $10,000 original loan balance to qualify for the prompt-payment discount after 36 months.

What if I have both subsidized and un-subsidized federal student loans?

You can, and should, consolidate both types of loans. In fact, you can consolidate them into one loan without losing the benefit of the federal subsidy that not only defers interest while you are in school, but actually pays your interest for that period.

What if I have private student loans?

Private student loans can also be consolidated. These loans must be consolidated separately, and the rate will be variable and based on the student -- or co-signer's -- credit.

What if my parents have PLUS loans?

Parents can consolidate PLUS loans and lock in current rates of 6.125% for as long as 30 years. The same rules apply regarding where you can consolidate.

And now, perhaps the most pressing question:

Which lender should I choose?

Student loan consolidation has become a big business, with billions in loans outstanding. Since the loans are federally guaranteed to the lender, it's also a profitable low-risk business. That's why you're seeing so many advertisements and emails on the subject.

With time running short, you want a company that will let you apply online and efficiently to make sure you beat the deadline.

Although I'm not a big fan of Sallie Mae because it lobbied Congress to pass restrictive legislation that works against students, the company is still at the top of my list for those rushing to beat the deadline. Its online loan-application process takes about 15 minutes, allowing you to simply complete the form, sign it electronically by checking a box, and then clicking to send the application to them. The application is date and time stamped, and you'll receive confirmation that it has been received.

There are more than 3,000 approved student loan consolidators, and if they haven't found you, you can search for them on the Internet. As long as you follow the guidelines above, and don't procrastinate, you'll save a small fortune in interest over the life of your loan. And that's The Savage Truth.

Terry Savage is an expert on personal finance and also appears as a commentator on national television on issues related to investing and the financial markets. Savage's personal finance column in the Chicago Sun-Times is nationally syndicated, and she released her fourth book,

The Savage Number: How Much Money Do You Need?

in June 2005. Savage was the first woman trader on the Chicago Board Options Exchange and is a registered investment adviser for stocks and futures. A Phi Beta Kappa graduate of the University of Michigan, Savage currently serves as a director of the Chicago Mercantile Exchange Corp. She also has served on the boards of McDonald's and Pennzoil.