Tuesday, January 31, 2006

Consolidate student loans NOW

There have been lots of headlines lately about major changes in student-loan legislation that will reduce the amount the federal government spends on education subsidies. One practical offshoot of this is that rates are about to jump this summer, to 6.8% on Stafford loans, up from the current 4.7% (for students currently in school. For those out of school, it's 5.3%). Those with loans still lingering can take advantage of consolidation to lock their rates down before the hike hits.

I've been nervous about consolidation. I've heard the horror stories: Consolidate once, and you can never go back. If rates go down, you're still locked in -- unlike a mortgage, you can't refinance your consolidation.

But I'm also hearing the horror stories about waiting to consolidate and getting glued into this summer's higher rates. I decided to take my 4.7% rate and run with it. (Consolidating can also lower your monthly loan payments, by extending the repayment term. Of course, stretching the loan over a longer period increases the interest you ultimately pay. Fortunately, there are no prepayment penalties -- I'm planning to keep paying at a higher rate than my minimum. If you're crunched for cash, though, consolidation can be very helpful.)

I also held off on consolidating because I didn't think I should do it while I'm still incurring new loans. Turns out, thought, that that's actually a really good time to do it. While you're in school (or in the just-left grace period), rates are slightly lower. Also, while you only get one shot at consolidating, having a new, unconsolidated loan is a reset button. You can't redo already consolidated loans, but you can redo the process if you have a new loan to add to the mix.

Consolidation has never been easier. Instead of mucking around with long and intimidating paper forms, you can do it all online, either through the government's website or through your lender's. (I did all this through Citibank's site.) Filling out all the paperwork for mine took less than an hour, and all the info I needed was available online -- I just cut and pasted balances into the consolidation form.

Student loans are daunting, but being an ostrich about them is costly. I'm kicking myself for not consolidating a year ago, when rates were even lower. Grr.