Net Gains: New Savings on Student Loans

June 17, 2008 — -- Recent college graduates and their parents are days away from enjoying what might be one of the last, best opportunities to save money on their student loans.

On July 1, interest rates on some federal student loans will drop by 3 percentage points, allowing certain borrowers no longer in school to lock in a low rate for the life of their loans and potentially save thousands of dollars in interest charges.

They can do this by converting student loans issued before July 1, 2006 into a single consolidation loan that could carry a fixed rate as low as 3.625 percent.

There are a number of rules borrowers need to understand, the first being that waiting until July 1 is key. Act a day too soon, and it will cost them by locking them in at current rates ranging from 6.625 percent to 8.125 percent.

To maximize their savings, however, former students should wait no longer than six months after leaving school. So somebody who just graduated in May has until November to reap the maximum benefit.

Consolidation loans essentially are an opportunity to refinance college debt. The process involves taking one or more student loans and converting them into a single, fixed rate loan.

The process provides the opportunity to lengthen repayment periods in order to lower monthly payments and make it easier to manage multiple loans by combining them into a single monthly payment.

The big incentive, however, has been the opportunity to take a variable rate loan with payments that rise and fall with interest rates and convert it into a fixed-rate loan with payments that remain the same. This was true particularly during periods of falling interest rates.

The consolidation-loan business, however, is in serious decline now as a result of changes in federal student loan rules and the recent turmoil in the credit markets triggered by the subprime loan crisis.

Student lenders such as Sallie Mae that a few years ago aggressively pitched consolidation loans to recent graduates now are pulling out of the market.