Payback Time
Attention, students, grads, and parents: Act now to lock in low rates on your college loans
John Kingman, a commercial banker from Henderson, Nev., is a financially savvy guy. So he was a little skeptical when a recent letter urged him to act fast to lock in what sounded like too-good-to-be-true interest rates--2.6 to 4 percent--on his and his son's federal education loans. But the offer was legit. Kingman filed his application to grab the low rate on the loans he'd taken out to help pay his youngest son's college expenses. And Kingman made sure his son, who just graduated from Arizona State University, did the same for his student loans, before he even cleaned out his apartment or found a job. "This is going to save us a substantial amount of money," says Kingman.
Normally, when somebody touts a suspiciously good deal and pressures you to hurry, it is wise to run the other way. But parents, college students, and recent graduates really are being handed the bargain of a lifetime on federal education loans. But the deal expires June 30.
Every July 1, the federal government sets interest rates for student and parent education loans. It does so by adding a premium (from 1.7 to 2.5 percentage points, depending on the loan) to the rate of the last 91-day treasury bill auction in May. Last year, T-bills went for 1.07 percent. So far this May, they've been selling for about 2.9 percent. So college loan rates are expected to jump from their 40-year low by about 2 percentage points. That puts pressure not only on millions of procrastinating parents and graduates but also on millions of current students who last week got the go-ahead from the Department of Education to "consolidate" their student loans to nab the low rates. A consolidation loan replaces all of a borrower's old variable-rate federal education debts with one fixed-rate loan. (Private education loans are not eligible.) "This really is a now-or-never situation," says Kate Rube, higher education advocate with the State Public Interest Research Groups.
Before last week's ruling, the Education Department had estimated that 1.6 million Americans would consolidate this year, triple the number of five years ago when interest rates were higher. But lenders are now urging just about every student, graduate, and parent to give them a call. April applications at the Missouri Higher Education Loan Authority, a nonprofit lender in Chesterfield, Mo., were up 40 percent over last year. Now that current students are eligible, "May and June are just going to be crazy," predicts Greg Diamond, manager of consolidation and parental loan services.
Steals and deals. No wonder. Nearly two thirds of approximately 15 million undergraduates have federal student debt; the average debt to Uncle Sam upon graduation is $19,400. In addition, 40 percent of last year's 2.4 million graduate students borrowed an average $15,500 from the federal government. And there are 2.3 million recent graduates and parents who have enough federal debt to make consolidation worthwhile. One of the biggest groups eligible: the 735,000 parents like Kingman who borrowed an average of nearly $9,000 through the Parent Loan for Undergraduate Students (PLUS) program in the past school year.
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