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Student Loans: Some Good News Part I

College-graduation-300x199A student loan afforded you a good education – OK.  The loan was was made at an exceptionally low interest rate – no problem. There was no repayment until after graduation – I get it! A student loan is one of the best financing opportunities around, but now it must be repaid.

For some borrowers, graduation is a happy time – a time of celebration, starting a new career, and even retiring college debts. For others it can be quite the opposite – no job, career is put on hold, and even more debt in addition to the college loans. Fortunately, the good deal gets even better. While not a solution to finding a good job or starting a career, here are some things that might actually help manage or in some cases eliminate your student loan.

Interest Rate Reduction

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

Issued July 1, 1998 through June 30, 2006

Stafford Loan: Subsidized

  • 2.47% for loans in repayment (down from 2.48%)
  • 1.87% for in-school, grace period, and deferment status loans (down from 1.88%)

Stafford Loan: Unsubsidized

  • Same as subsidized Stafford Loan

PLUS Loan

  • 3.27% (down from 3.28%)

Issued on or after July 1, 2006

Stafford Loan: Subsidized

  • 4.5% for loans disbursed on or after July 1, 2010 through June 30, 2011
  • 3.4% for loans disbursed on or after July 1, 2011 through June 30, 2012

Stafford Loan: Unsubsidized

  • 6.8% fixed

PLUS Loan

  • 7.9% fixed

Federal loan 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%). 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% (2.47% rounded up to the nearest 1/8th of a point). Lowering your interest rate can potentially save you hundreds or thousands of dollars over the life of the loan.

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

  1. You can only consolidate your loans once, so if you did so previously, you can’t do it again
  2. You can’t add private student loans into a federal consolidation loan
  3. If you’re still in school, you can’t consolidate your loans–you must wait until you graduate
  4. 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

Repayment options will be discussed in Part II of this post. For some, this is a way to reduce payments and even eliminate a portion of the obligation!