Student Loan Update
April 16, 2008
With the economy the way it is, many people who have student loans are wondering if they should either refinance the loan or consolidate several loans. In some cases, this is a smart move, but in many more cases it is not.
For those who do not know it, in the past, virtually all student loans had variable rates. If the loan payments became too burdensome, the borrower could consolidate the loans which often made it easier to pay. The new consolidated loan was nearly always a fixed rate loan.
A couple of years ago, 2006 in fact, all of the Stafford and Plus loan programs went to a fixed rate system of student loans. This move made it possible for borrowers to get a fixed rate loan at the time of the loan rather than having to consolidate loans later on. The issue now is whether or not it is wise to consolidate those fixed rated loans into a single loan.
Most experts now agree that borrowers who have fixed rate loans should never consolidate them. Consolidating these loans will result in a higher interest rate. The math on the new consolidation loan works like this: the new interest rate will be the weighted average of the rates of the loans being consolidated, rounded up to the nearest 1/8 of 1 percent.
The current information on subsidized Stafford loans taken out for the 2007-08 academic year is that they carry an interest rate of 6.8 percent; the rate for 2008-09 loans is 6 percent, and for 2009-10, 5.6 percent. Unsubsidized loans will charge 6.8 percent fixed rate indefinitely.
For Plus loans sold through the Direct Loan program, rates are fixed at 7.9 percent. Plus loans dispersed through the Federal Family Education Loan (FFEL) program have an 8.5 percent rate.