Student Loan Consolidation Limits Eased
Tuesday, May 17, 2005
The Education Department agreed yesterday that student borrowers who are still in school may consolidate their government-guaranteed loans -- a step that clears the way for students to lock in today's low interest rates.
The guidance sent out by Assistant Education Secretary Sally L. Stroup put the department's seal of approval on a legal interpretation that a small number of lenders had adopted in response to fears of some college seniors and others nearing completion of their education that they would miss a chance to capture rates that are near historic lows.
Students who have already graduated or left school have long been allowed to consolidate their loans, or even a single loan, into a single, fixed-rate note, and there has been a rush to do so this spring, before the June 30 deadline.
Most federally guaranteed student loans carry a variable rate tied to the three-month Treasury bill. The rate is adjusted annually based on the rate on the last T-bill auction each May. Last year, that rate translated to a 2.77 percent interest rate for the student borrower still in school or a recent graduate. But with interest rates rising, the new rate July 1 is expected to be nearly two percentage points higher.
When a student consolidates his or her loans, the new note will carry a rate that is a weighted average of the rates on all the loans included in the consolidation.
Experts cautioned students to think things over before rushing to consolidate.
"This is one of a lifetime of financial decisions that students will face. Students must weigh their options -- a grace period or the opportunity to fix a low interest rate," said Martha Holler, a spokeswoman for Sallie Mae, the big education finance company.
For example, students are entitled to a six-month grace period after they leave school before they have to start making payments. Consolidation eliminates that.
Also, some lenders have been willing to take consolidation applications and in effect sit on them until the end of the grace period, thus giving the student the benefit of the grace period and the previous year's rate. With in-school consolidation, which the department dubs "early conversion to repayment," that will not be allowed.
"A lender may hold an application only for the period of time necessary to receive and process" the necessary loan documents, the department said.
However, a borrower may request an in-school deferment, so that he or she does not have to start making payments until after graduation or leaving school.
The government's own Direct Loan program had no bar to in-school consolidation, and thus is not affected, a department official said.