June 1, 2007
Gaurav Bhola, MSM, managing editor
Well, it is that time of the year when the first wave of students have graduated. Their immediate concern is regarding their future career, landing a job. The next and most pressing, sometimes agonizing decision relates to their student debt. What to do? I know you have the six month grace period before the big decision has to be made regarding any debt consolidation. But I want to share with you recent developments regarding student loans.
The grace period ends six months after the date of graduation. However, the tough choice will start before the end of the grace period. The government last year enacted a new law which eliminated the old single-holder rule. This old rule required borrowers to only undergo student loan consolidation with the lender who held their federal student loan. But with the change, students are free to choose who they consolidate their loan with irrespective of who their current student loan lender is. In 2006, Congress passed a bill cutting $12 billion from student loan programs. It meant subsidies to lenders were slashed and would increase interest rates on loans taken out by parents.
In addition, Congress abolished variable rates for federal Stafford loans. All student loans, parent student loans, and graduate student loans instituted after July 1, 2006 have a fixed rate of 6.8 percent. Well that is good for students graduating in year 2010 because consolidating no longer affects the interest rate they will pay. It is important for recent graduates to consider consolidating their loans while in their grace period. The reason is if you consolidate during the grace period, you lock in your interest rate 0.6 percentage points lower than if you consolidate after your grace term ends. But once you consolidate, you loan payment will start within 60 days from date of consolidation. There’s no need to worry, many lenders can set up the 60 days to be the last 2 months of your grace period.
Another period that is of importance for students with variable-rate Stafford loans is the one before July 1. Recent graduates can secure a 6.54 percent interest rate today. However, the rate will climb to 6.62 percent if you don't consolidate before July 1. The increase on July 1 is because the loan interest rate is based on the bond equivalent rate of the 91-day Treasury Bill that takes effect on July 1. Also, students with variable-rate Staffords who don't consolidate could see their interest rates rise to 7.22 percent once their loans enter repayment.
Irrespective of the type of loan you have, if you consolidate you can lower your monthly payment by extending the standard Stafford loan term of 10 years all the way to 30 years; but bear in mind the longer the term the more you pay in interest. So remember if you got a Stafford loan before July 1, 2006, it makes sense to consolidate to get a possible lower rate.
