Final fiscal exam
DETROIT — Brook Woolley and his fiancee, Erika Bracamontes, both graduated May 14 from the Michigan State University College of Human Medicine. On June 11, the couple will wed in her hometown of San Francisco. They’ve just bought a house in Grand Rapids, Mich. They’ll each begin a residency program later in June at Spectrum Health, a not-for-profit health care system in western Michigan.
And, oh, yes, they have one more thing on their long to-do list. They’re going to find time between now and June 30 to consolidate their student loans.
They have a strong motivation to do what they can to lock in the rock-bottom rates for student loans. Together, Woolley and Bracamontes have $300,000 in student loans.
It doesn’t matter how swamped you’ll be in the next few weeks. It doesn’t matter if you’ve gone to medical school or law school or gotten an undergraduate degree or are still a sophomore or junior in college. If you have student loans, you have one more homework assignment to complete before July 1.
See if you, too, can take advantage of some historically low rates by consolidating those student loans now.
“It’s your last chance,” said Mark Kantrowitz, publisher of www.finaid.org, an online guide to financial aid.
Rates on student loans are heading higher — significantly higher — beginning July 1.
“It’s hard to imagine a case where consolidation wouldn’t be beneficial at this point,” said Erin Korsvall, a spokeswoman for Sallie Mae, the country’s largest originator of federally insured student loans.
Students who are still in college want to pay attention, too. Ditto for their parents.
Recently, the U.S. Department of Education announced that a little known loophole makes it OK for student borrowers who are still in college to consolidate their government-guaranteed loans.
By acting before July 1, students who consolidate while in school — or during their grace period after they graduate — can lock in a rate of 2.88 percent for Stafford Loans.
Consider this example:
Say a student has $20,000 in student loans. He or she can consolidate at the in-school rate — either while in college or within a six-month window after graduation.
At 2.88 percent, Kantrowitz said, the monthly payment would be $192.02 and the debtor would pay $3,041.79 in interest.
But take someone who graduates in May but waits until December to consolidate. Then, Kantrowitz estimates, the student could end up paying 5.38 percent.
At 5.38 percent, the monthly payment would go up to $215.87 and the total interest paid would be $5,903.65.
We’re talking about a savings of $2,861.86 in interest over a 10-year loan — if the student acts before July 1. It’s real money, money that could be used toward a down payment on a car or a condo. Why throw it away?
“At this point, it’s a no-brainer. If you can consolidate, you should consolidate,” Kantrowitz said.
What to do:
If you’re still in college, you’d need to ask your lender to put the loan in repayment status early. You’d then be eligible to consolidate. You could have to start repaying while in college, but some lenders won’t make you do that if you request an in-school deferment.
A potential roadblock: Many lenders will consolidate loans for students who are still in college only if they have loan balances of $7,500 or more. Some lenders, such as Sallie Mae, have a minimum of $5,000.
Borrowers who consolidate bank-based student loans to get the in-school rate would lose a six-month grace period after graduation. During the grace period, they wouldn’t have to pay any bills. A lender might offer some options to help you hold onto that grace period. Ask.
Talk to your lender first. Sallie Mae also offers advice at 800-448-3533 or www.smartloan.com. Sallie Mae has a special address for students who are still in college: www.smartloan.com/student.
Some lenders offer lower rates if you have the payment automatically taken out of your checking account.
Parents should consider consolidating PLUS loans taken out for their children. PLUS loan borrowers who consolidate now may lock in rates as low as 4.25 percent.
Do not include a Perkins loan in the consolidation loan. A Perkins loan has several benefits that aren’t available with a Stafford loan. One, students get a nine-month grace period, not six months, after they graduate before they have to pay on their Perkins loans. So you’d be giving up a longer grace period.
And Kantrowitz notes that while you’re in school the government pays the interest that’s building on the Perkins loan. If you consolidate a Perkins loan, you lose that subsidy.
Kantrowitz recommends going for a 10-year term. Sure, it might seem tempting to opt for a 15-year loan when you’re consolidating your student loans. After all, the longer the term, the lower the monthly payment.
And lenders offer even longer terms — say 20 years or 25 years — depending on the total amount of the loans consolidated. If you have $60,000 or more in consolidated loans, for example, lenders can offer you the option of extending that repayment term to 30 years.
But the longer the term, the more interest you will pay in the long run.
Taking 20 years or 30 years to pay off student loans is really a long, long time. During that time, you could be feeding a whole new generation of bills.
“You don’t want to be paying off your student loans when your kids are in college,” Kantrowitz said.