The National Financial Awareness Network, Inc., a Maryland-based financial literacy company, is urging consumers to consolidate their federal student loans to lock in a lower rate before interest rates increase 40 percent on July 1, 2006.
Each July, lenders will raise interest rates on federal education loans, such as Stafford and PLUS (Parent Loans for Undergraduate Students) loans, taken out prior to July 1, 2006. The rate increases are mandated by the Department of Education. Under current law, interest rate increases for federal student loans cannot exceed 8.25 percent.
Students currently repaying their loans could receive a rate as low as 5.375 percent by consolidating. Some lenders offer incentives that further reduce the fixed rate such as additional percentage reductions after several years of on-time payments or for automatic withdrawals.
Consolidation extends the term of the loan up to as much as 30 years, depending on the loan amount. Students who choose not to consolidate must pay their loans off in 10 years and the rate remains variable, rising as high as 8.25 percent. While paying off the loan in ten years means less time for interest to accrue on student loan balances, the rate is not fixed unless the loans are consolidated. This means that the higher, variable interest rates could add up -- even for shorter loan periods.
“From our research and our discussions with student loan consolidation experts, the best plan of action for consumers with student loans is to lock in low interest rates now and then setup a repayment plan to fully pay off the loan as soon as possible,” said John Janney, president of the NFAN. “The goal of locking in a low interest rate is to save money, and quicker repayment means spending less in interest charges.”
As a result of the new rates, students with a debt of $20,000 could pay $4,500 extra over the life of a loan in a 20-year period, according to Mary Montiel of Collegiate Funding in San Diego. Students will have a loan interest rate of 7 percent unless they consolidate before the July 1 deadline and lock in a fixed rate as low as 4.75 percent.
“Students who want to pay their loans off as quickly as possible should still consolidate prior to the July 1 deadline and then pay more than their minimum monthly payment,” said Montiel. “There is no early repayment penalty, so locking in the low rate now can help save them a lot of money in the long run.”
Graduates with $20,000 in loans, an average amount for a four-year student, will pay $136 per month for a total of $32,681 if they consolidate today, $157 per month for a total of $37,575 if they consolidate after July 1st and $234 per month for a total of $28,000 if they do not consolidate at all at current variable rates. If a student consolidates today and pays in 10 years, the total repayment is $25,167.
The National Financial Awareness Network, Inc. (nfan.com), is a financial literacy company based in Columbia, Maryland, that offers educational products and services to debt relief agencies, their clients and the general public.