Student Loan Consolidation Deadline This Week

June 28, 2006 — -- Friday is the deadline for current and former college students to consolidate their federally guaranteed loans and lock in new fixed interest rates that, starting Saturday, will rise as high as 7 percent.

Under the mandated change, Stafford loans, the loans most commonly used by students, will no longer come with an adjustable rate, which means a farewell to the long era of low interest rates.

As college costs outpace family incomes and the availability of nonloan financial aid grows more slowly than tuition, more and more students have turned to loans to finance their educations. For example, two-thirds of this year's graduates carry an average student loan debt of $17,500.

But the consequences of the new legislation are not as dire as they might seem. "If you have student loans, you can consolidate and lock in a low interest rate," said Sandy Baum at the College Board, which, in addition to administering college SAT tests, also tracks financial aid.

That means current students, those who graduated in 2006 and even those who graduated years ago can consolidate their outstanding loans and lock in a fixed rate lower than future borrowers will pay.

For current students and graduates, the interest rate is 4.7 percent. That will rise on July 1 to 6.54 percent. Those who graduated years ago can lock in a rate of 5.3 percent before the rate jumps to 7.14 percent. And those rates are forever, no matter how high interest rates rise in the future.

Economists say that in the current environment, including an expected increase in short-term interest rates from the Federal Reserve Board's Open Market Committee tomorrow, interest rates are only headed up for the foreseeable future.

According to the College Board's Baum, "When you consolidate, you can extend the amount of time that you take to repay the loans. And the longer you take to repay the loan, the lower your monthly payment will be."

Of course, that means paying more in interest.

Still, some 2006 graduates question whether they should consolidate this week because they will lose the six-month grace period under which they are not required to make any payments.