Consolidating student loans

A graduation cap with money symbolizes student loans

TEXT OF INTERVIEW

Tess Vigeland: This week yet another student loan lender announced it's not issuing any more new loans. Brazos Higher Education Service Corporation joined more than 30 other institutions that are pulling back from student lending because of the credit crunch and lower federal subsidies.

Many have also stopped making consolidation loans, but for students who are still hoping to consolidate, SmartMoney.com reporter Anna Maria Andriotis says hang on.


Anna Maria Andriotis: This is actually the first time in a very long time that consolidating student loans is bad idea. We have two different types of student loans that we need to keep in mind: there's variable rate student loans and there's fixed rate student loans.

Vigeland: What do most students have?

Andriotis: Up until July of 2006, every student who applied for a federal loan got a variable rate student loan. Fixed rate student loans did not exist, so right now there's a good chunk of students most likely and especially students who are still in school, maybe students who recently graduated, who are probably juggling both variable rate and fixed rate student loans.

Vigeland: OK, well then let's go ahead and start with the variable rate. Where does that fit in this whole issue of consolidation?

Andriotis: Basically, if you're holding on to a variable rate student loan and you haven't consolidated it yet, you don't want to consolidate it right now. What you want to do is you want to wait until July 1. That's because every year on July 1, the rates for the variable rate student loans reset.

Vigeland: What kind of difference is it going to be in rates from now 'til then?

Andriotis: Right now, for somebody who's holding on to a variable rate student loan, the current interest rate on that is 7.22 percent. If you consolidate these loans right now, you're going to get a slightly higher interest rate, 7.25 percent. If you wait a few months, it's projected that your rate will be 3.5 percent.

Vigeland: OK, that's a pretty major difference.

Andriotis: Yes, that is a very significant difference.

Vigeland: So that's variable rate loans. What if you only have fixed rate loans? Should you consolidate then?

Andriotis: The main purpose of consolidating your student loans used to be that you have all these loans, they all have these variable rates, why not bring them all together and get one fixed rate? Well, with fixed rate loans, that's kind of really not an issue anymore, because your rate will remain the same throughout the entire life of that loan. Until the moment that you have a zero balance on that loan, your rate will remain the same. Consolidating them would make no sense at this point.

Vigeland: So the key here is that folks should simply wait until July 1?

Andriotis: Exactly. Now, several sources who I spoke with who track, in general, the variable rate student loans have said to me that it's basically a guarantee that the official rates that will be locked in for the variable rate loans will be at historical lows. If not the historical low, one of the lowest rates ever.

Vigeland: So this would be a good time for all kinds of folks with student loans to really take a look at refinancing those, right?

Andriotis: Not exactly. Once you consolidate your student loans, it's very hard to refinance them. Even if you do, you're not going to lock in that low rate that's coming up on July 1.

Vigeland: OK. Anna Maria Andriotis writes for SmartMoney.com. Thanks for educating us on student loans.

Andriotis: Thank you.

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