Should I Consolidate My Student Loans?

If you have a federal Stafford Loan or PLUS Loan issued on or after July 1, 1998 and before July 1, 2006, consider yourself lucky. Beginning July 1, 2009, the interest rates on these variable-rate loans are set to drop to the lowest rates in the history of the federal student loan program. These new rates will be in effect through June 30, 2010, after which they will reset again.

Just how low are these rates? Well, starting July 1st, the new interest rate on Stafford Loans in repayment status is 2.48%, down from 4.21%; the new interest rate on in-school, grace period, or deferment status Stafford Loans is 1.88%, down from 3.61%; and the new interest rate on PLUS Loans is 3.28%, down from 5.01%. Remember, you are only entitled to these rates if you have a federal Stafford or PLUS Loan that was issued on or after July 1, 1998 and before July 1, 2006.

Consolidation

If you have more than one of these variable-rate federal student loans, you can convert your variable interest rate to a fixed interest rate by consolidating your loans under the federal government’s loan consolidation program. The interest rate on a consolidation loan is a fixed rate that’s equal to the weighted average of the current applicable interest rates on the loans being consolidated, rounded up to the nearest 1/8th of a point (and capped at 8.25%). Lowering your interest rate can potentially save you hundreds or thousands of dollars over the life of the loan.

For example, suppose you have three separate variable rate Stafford Loans that you’re currently repaying. If you consolidate them, your new fixed interest rate for the life of the loan would be 2.5% (2.48% rounded up to the nearest 1/8th of a point). Let’s assume your balance is $20,000. Over the course of 10 years, your monthly payment on a $20,000 loan at 2.5% would be $189, and the total amount of interest you would pay over that 10 years would be $2,625. By contrast, if you had a $20,000 balance at a 6.8% interest rate (the current fixed rate for unsubsidized Stafford Loans), your monthly payment would be $230 and the total amount of interest you would pay over the life of the loan would be $7,619–a savings of $4,994 in interest. Over an extended 20-year repayment term, the savings would be even greater.

There are some things to keep in mind about loan consolidation:

  • You can only consolidate your loans once, so if you did so previously, you can’t do so again
  • You can’t add private student loans into a federal consolidation loan
  • If you’re still in school, you can’t consolidate your loans until you graduate

If you are eligible to consolidate your loans, you’ll need to go through the Federal Direct Loan Consolidation program. For more information, visit www.loanconsolidation.ed.gov.

Loans issued on or after July 1, 2006

If you have a Stafford or PLUS Loan issued on or after July 1, 2006, you aren’t eligible for these new low rates. Instead, your loan will have a fixed interest rate for the life of the loan–the exact rate will depend on the type of loan you have. For unsubsidized Stafford Loans (”unsubsidized” means the federal government does not pay the interest while you are in school, during grace periods, or during deferment periods), the interest rate is 6.8%. For PLUS Loans, the interest rate is 8.5%. And for subsidized Stafford Loans (”subsidized” means the federal government does pay the interest while you are in school, during grace periods, and during deferment periods), the interest rates are as follows:

  • 5.6% for loans first disbursed on or after July 1, 2009, and before July 1, 2010
  • 4.5% for loans first disbursed on or after July 1, 2010, and before July 1, 2011
  • 3.4% for loans first disbursed on or after July 1, 2011, and before July 1, 2012

Summary

The following table highlights the interest rates on different types of federal student loans.

Stafford Loan: subsidized Stafford Loan: unsubsidized PLUS Loan
Issued on or after July 1, 1998, and before July 1, 2006
  • 2.48% for loans in repayment (down from 4.21%)
  • 1.88% for in-school, grace period, and deferment status loans (down from 3.61%)
same as subsidized Stafford Loan 3.28% (down from 5.01%)
Issued on or after July 1, 2006 6.8% fixed
  • 5.6% for loans first disbursed on or after July 1, 2009, and before July 1, 2010
  • 4.5% for loans first disbursed on or after July 1, 2010, and before July 1, 2011
  • 3.4% for loans first disbursed on or after July 1, 2011, and before July 1, 2012
8.5% fixed

About the author

Jean Keener, CRPC®, CFDP®

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