CLAMP Campus Adventures

If you’re eligible, it’s very important to consolidate your Federal student loans prior to July 1, 2005. The Department of Education sets the student loan interest rate (variable if not consolidated) to go up or down on July 1 of each year. The rate you receive depends on several factors. The first is the type of loan you have. The second is the date the loan was disbursed. Third is whether or not you are currently in school. You receive a discounted rate while attending school on some Stafford Loans. Finally, the rate is based on the 91-day rate from the last Treasury auction in May and the average one-year constant maturity Treasury yield (CMT) for the last calendar week ending on or before June 26th.

It’s not possible yet to know the CMT, but it is possible to know the last Treasury auction in May and the rates went up significantly. The CMT is only used in the calculation of interest for Federal PLUS loans disbursed prior to July 1, 1998. Everything else uses the Treasury rate.

FinAid.org has already posted updated rates based on this amount. It’s what you can expect your unconsolidated loans to go up to on July 1. If you want to know the impact, here it is:

I have unsubsidized Stafford loans disbursed in the Fall and Spring of each year starting in 2001. My last disbursement was the Fall of 2004. I am currently at the end of my 6 month grace following my January graduation. During this time, I am not required to pay back my loans. My current rate is 2.77%. If I were paying the out-of-school rate, which would be in effect on 6/18/2005, I would be paying 3.37%. I signed up for EDA (Electronic Debit Account) which automatically deducts my payment from my bank account each month (starting 7/7/2005) which further decreases my interest rate by .25%, so that makes my interest rate if I were out of school and paying 3.12%. Of course, many former students have also earned 0.8% deduction in their interest rate by making 12 payments in a row on time.

Without consolidating, on July 1, 2005, if I continued at the in school rate of 2.77%; my interest rate would jump to 4.7%. Not quite double, but a significant jump. If I were paying the out of state interest rate currently at 3.37%, then my rate would jump to a whopping 5.3%. With the .25% discount for EDA, that’s still 5.05%.

In other words, I’d be a right idiot for not consolidating now, prior to the July 1 increase, locking in a low, fixed rate. Don’t forget I’m currently paying interest on my loans since they’re unsubsidized.

What about students in school now? You can only consolidate once, after all.

The answer isn’t simple. After all, once you consolidate, that’s it. Also, once you consolidate, you lose your grace period if you are currently in your grace period. However, consider the amount of money you’ll save not paying high interest rates on what you’ve already been loaned by the government. The rates are not likely to go down again. Actually, they’re likely to go up and the cap on student loan interest rates is 8.25%. That’s as high as it can go. Do you have more loans behind you than ahead of you? It might be worth consolidating and taking what you can get.

There’s also this handy fact. Once you consolidate, you can add in additional disbursements for up to 180 days from the date of the original consolidation. Let’s put this into perspective. 180 days is approximately 6 months, and if your consolidation goes through today, it’ll put you at December 1, 2005. If this is your last year in school, you should definitely consolidate. It’s probably a good idea to consolidate if you’ve got half your potential loan disbursements already. Think of it this way. You’re on the 5-year program and have already completed 3 years, this means you’ve already got the majority of your loans behind you. Plus, if you consolidate at the 2.77% rate, you can wrap in your Fall disbursement as well (and depending on your school, possibly your Spring disbursement). You’re keeping the rate for the majority of your loan down at a very low rate. If you’re taking out a total of $50,000 over the course of your entire education of 5 years, then you’re paying the low rate on $35,000 – $40,000 and the variable rate on $10,000 – $15,000. It’s a no-brainer in my opinion.

So consolidate, and consolidate today. You can do this online at the Direct Loan Servicing Center, at the Loan Consolidation website or by calling 1-800-557-7392 to get the forms to mail in. The TDD number for the hearing impaired is 1-800-557-7395.

Addendum:

As long as Direct Loans receives your application by June 30, 2005, you will receive the current interest rate. However, they’re going to be busy now the rates are unofficially known and it doesn’t hurt you to give yourself some time. I do not recommend waiting until June 29 to apply. Give yourself at least 5 business days prior to June 30 to get things in; I’d even go with 10 business days to be sure. We all know the government never messes up or misplaces things, right? If your application goes in 10 business days prior to June 30th, that’s June 16, which will give you until December 13 to roll in additional disbursements.