Hurry Up and Consolidate!

Posted on 24 August 2008

If you’re swamped with student loans, now might be the best time to consolidate to a fixed-rate loan to save money down the road. The reason? Interest rates are rising, and the government is mulling changes to the law that could make it impossible to get a fixed rate in the future.

The federal student loan rates are adjusted annually every July 1, and have been rising along with the Federal Reserve’s federal-funds rate. This rate, which is currently 3.25 percent, is projected to continue rising.

Although student borrowers can still consolidate their loans and receive a relatively low fixed interest rate, Congress could soon change this practice.

Under Congress’s proposed legislation, student loans could still be consolidated, but they would be consolidated with an adjustable rate – instead of a fixed rate – that could go as high as 8.25 percent. The government pays the difference between the student-loan rate and what the lenders charge when the rates rise, so the proposed change would save the government some money by passing on some of the cost to the student borrower.

The best rate interest federal student loan borrowers can get rose from 2.875 percent for 2004-2005 to 4.75 percent on July 1, 2005 for the 2005-2006 fiscal year. While it’s impossible to know what the future will hold, current college students and recent gradates should seriously consider consolidating their loans now to reap the rewards from the still relatively low rate. In the 1990s, student loans came with an interest rate of more than 8 percent.

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