You can cut your student loan costs
Psst: Hey, Joe College. Wanna save a couple of thousand bucks? Then put down the Xbox and pick up the phone.
College students and graduates—and their parents—have until June 30 to save themselves thousands of dollars on their outstanding educational loans. Even if they have only one educational loan, they can call their school or lender, or shop online, and apply to "consolidate" federally backed educational loans. (Credit card and private education debts, unfortunately, cannot be refinanced this way. And those planning to borrow for next semester have to wait and pay higher rates.)
Those who already have federal educational loans can take advantage of a legal quirk that allows debtors to lock in last year's low interest rates before they jump by almost 2 percentage points on July 1. (Here is a chart showing the current rates.) Like every government program, this one involves some paperwork. But the effort will be worthwhile.
Students currently in school could cap payback rates on loans they've already taken out at a fixed rate of no more than 4.75 percent. If they do nothing and let their existing loans continue to fluctuate with treasury rates, they'll be charged 6.5 percent starting July 1. Those who've left school and have already started repaying their loans can put a ceiling of 5.375 percent on their Stafford loans, which would otherwise jump to 7.14 percent in July. Parents who borrowed through the Parent Loan for Undergraduate Students (PLUS) can cap their interest at 6.1 percent. Those who don't consolidate will see interest rates jump to 7.94 percent July 1. Many consolidators will pay even less. Most lenders offer discounts—such as knocking anywhere from 0.25 to 0.5 percentage points off the rates of those who pay by automatic debit.
Those who don't consolidate will have to fork over some serious coin. The average student borrower graduates with about $20,000 in debt these days. Graduates who don't consolidate will very likely see their monthly payments jump from today's $216 to $233 in July. At that rate, the graduate would pay $2,140 more over the typical 10-year life of a loan.
Consolidators can cut monthly bills even more dramatically by stretching out repayment to as much as 30 years. That slashes the typical recent graduate's student loan payment almost in half—to $112 a month. Those monthly savings come with a cost, however. The extra 20 years of payments add more than $12,000 in interest.
But while consolidation is advisable for most borrowers, for some it might be best to sit tight.