Graduates -- and their parents -- can save by refinancing college loans

Posted: Thursday, June 14, 2001

NEW YORK (AP) -- Just as lower interest rates have sparked a boom in the refinancing of mortgages, they're expected to give a big boost to the refinancing of student loans.

The rates on federally guaranteed loans, which change annually based on the three-month Treasury bill, will drop July 1 to the lowest level in years.

New borrowers will benefit. So will debt-burdened graduates -- and their parents -- who will be able to consolidate outstanding loans at fixed rates that are more than 2 percentage points lower than just a year ago. Even those with a single loan can consolidate -- essentially refinance -- to lock in the lower rate.

''There's going to be a lot of activity with consolidation because it's such a good deal,'' said Kalman Chany, a New York education consultant who wrote ''Paying for College Without Going Broke.''

Ryan Katz, a manager at the Student Loan Consolidation Center in Del Mar, Calif., said there are several reasons to consider consolidating student loans, such as those issued under the federal Stafford program or the Parent Loans for Undergraduate Students, better known as PLUS loans:

-- You end up with a single monthly payment.

-- The term, generally 10 years, can be extended for up to 30 years, thus reducing your monthly payment.

-- And, best of all, you can turn what is essentially a variable-rate loan into one with a fixed rate. Under federal law, most student loans have variable rates until and unless they are consolidated or refinanced.

''This year, you not only have the option of lowering your payment, you also have the opportunity to lock in a good rate,'' Katz said.

There's no question but that Americans are graduating with a lot of debt. Graduates of public universities and colleges typically end up owing more than $10,000 for their undergraduate years; that rises to more than $14,000 at private schools. Graduate-level students often owe more than $24,000, while those who go for medical or law degrees can accumulate even more.

Vicki Zacchetti of the Collegiate Funding Services in Fredericksburg, Va., says that many who seek loan consolidations are in their late 20s or early 30s and have spent at least some time in graduate school.

She pointed out that for a student with $30,000 in outstanding student loans, the savings via consolidation can be significant:

A typical Stafford loan in repayment on July 1, 2000, carried an 8.19 percent interest rate with a monthly payment of $367 for 10 years. As of July 1 this year, the rate will drop to 5.99 percent, reducing the monthly payment to $333.

If the borrower consolidates, he or she can lock in a rate of 6 percent and extend the term to 20 years, reducing that monthly payment to $215. Very large debts can be amortized over 25 to 30 years, she added.

For PLUS loans, the new consolidation rate will be 6.875 percent. There also are consolidation options for other student loans, such as those for health studies.

Mike Kidwell, a co-founder of credit counseling service in Rockville, Md., notes that extending the term of a loan, even at a lower rate, can result in more interest being paid over the life of the loan.

Still, he suggests that spreading out college loan payments can be a boon to new graduates. ''It gives them a little breathing room until they get their feet on the ground,'' Kidwell said.

Sallie Mae, the government-backed student loan originator and secondary market, is among the organizations that do consolidations.

Patricia Schershel, Sallie Mae's loan consolidation officer, says borrowers with a single loan or several loans from a single bank or institution should go there first to check on consolidating, since it can reduce the paperwork. ''The formula for the interest rate is the same wherever you go,'' she said.

Graduates repaying loans will get an added bonus starting next year: The new tax law signed by President Bush earlier this month eliminates the 60-month limit on writing off interest payments.


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