A better deal for student-loan refinancing
Sometimes, it pays to procrastinate. Students and parents who still haven't locked in fixed rates for their educational loans before the June 30 deadline have just been given a chance to save a little more money. But even for them, time is running out.
The new opportunity was a result of a provision buried in a bill providing extra defense funding that President Bush signed into law late last week. The amendment allows borrowers who have all their federally guaranteed loans from only one lender – estimated at more than 4 million Americans–to shop around for the best deal. And growing competition has created some deals that could save borrowers hundreds of dollars.
Until the night of June 15, federal law required customers who had all their student or parent loans from a single lender to "consolidate" their loans with that lender, which meant they couldn't shop for the best deal.
So the change of the law has set off a flurry of shopping activity. For example, at EdAmerica, a nonprofit lender based in Knoxville, Tenn., the number of clicks on its website has more than doubled in the past week, says CEO Tony Hollin.
"This is a great opportunity"—for students and parents—Hollin says.
Originally designed to allow borrowers to combine all their adjustable-rate federal education loans into one fixed-rate debt, "consolidation" has morphed into a real money-saver for borrowers. Those with just one loan can consolidate and thus lock in low interest rates. Right now, consolidation is an extraordinary bargain. Federal education loan rates are changed only every July 1. So until June 30, borrowers can lock in last year's low rates. Borrowers who wait will be sorry, since on July 1, the consolidation rates will jump about 2 percentage points to match current market rates, which have been rising dramatically in recent months. Current students and recent graduates who consolidate their Stafford loans by June 30, for example, can lock in rates of no more than 4.75 percent. If they don't consolidate, the rate on their variable loans will jump to 7.13 percent, which would add more than $2,000 to the costs of repaying a $20,000 debt over 10 years, the College Loan Corp. warns.
Even better: The growing competition among consolidation lenders could save borrowers even more. Most lenders, for example, will knock a quarter of a percentage point off of loans to parents or students who agree to pay by automatic debit. And some new lenders are offering even better deals, says Kevin Walker, CEO of consolidationcomparison.com. A three-year-old company called CollegePayWay, for example, says it will knock off half a percentage point for automatic debit and cut another 1 percent off the interest rate of anyone who makes 12 on-time payments. That would bring the average rate, over the life of the loan, down to 3.29 percent, Walker calculates. That means a borrower could save almost $400 over the 10-year life of a loan.
Unfortunately, consolidation will be much less of a bargain for those who need to take out new loans after July 1. Congress switched all future educational loans to new higher fixed rates of 6.8 percent for all students and 7.9 to 8.5 percent for parents, so borrowers won't be able to take advantage of swings in variable rates.
advertisement
