Do you or someone you know have student loans? If so, you have what may be a once in a lifetime opportunity to consolidate these loans into a low interest rate while potentially extending the term over which the loans must be repaid. But you must hurry. On July 1st, rates will go up by a minimum of 1.93%, the first increase in 5 years and the largest 1-year increase in the 40-year history of the program. The reason for this steep increase is that consolidation loan interest rates are adjusted on July 1 of each year based on the 91-day U.S. Treasury Bill yields (May auction) and the Federal Reserve has raised rates eight times over the past 12 months causing Treasury Bill yields to rise as well.
Here’s what you need to know:
Most federal based loans qualify including Stafford, Perkins and Plus loans and you can choose to consolidate all or part of your loans into one new loan. Current law allows you to consolidate loans only once so you should make your decision thoughtfully.
Most student loans are based on variable interest rates but the consolidation program allows you to consolidate two or more loans into a fixed rate loan. Under most circumstances, your loan balance must be at least $10,000 to qualify for the consolidation program. The total balance of your loans determines the potential payback term:
If your loan balance is: Your maximum repayment period is:
Less than $ 7,500 10 years
$ 7,500 to $ 9,999 12 years
$10,000 to $19,999 15 years
$20,000 to $39,000 20 years
$40,000 to $59,000 25 years
$60,000 or more 30 years
You should always choose the longest repayment period that you qualify for because you can prepay at any time without penalty.
There are no costs or fees to consolidate qualifying student loans.
To receive the best rate, you should consolidate your loans while you are in school or during your grace period. The grace period begins the date of your graduation and lasts for six months. During your grace period, you are not required to make any payments. By consolidating your loans during this period, you will be given the lowest interest rate possible for when you begin to make payments. If you wait to consolidate after your grace period, your interest rate will be higher.
If you die during the loan repayment period, your loan is automatically cancelled. If you are married and are considering doing a joint consolidation loan, consider this option very carefully. If your spouse dies, you will continue to be responsible for full repayment of the joint loan. Typically, your best bet is to consolidate separately.
Consolidation rates are based on the weighted average of the loans being consolidated, rounded up to the nearest 1/8 of 1%.
The interest paid on your student loans may qualify for a full or partial interest deduction. The rules for deductibility of student loan interest changed in 2002, making it easier to qualify for a deduction. You are not required to itemize in order to receive an interest deduction. For detailed information about tax deductibility of loan interest, go to www.irs.gov and enter Publication 970 in the search engine.
Don’t underestimate the value of being able to stretch out your payments over a long time period at a low fixed rate. This can significantly reduce your payments, freeing up cash for other purposes and allow you to more easily qualify for other types of loans such as a home mortgage. For more information contact CFS at 1-888-423-7562 or go to www.cfsloans.com. You may also go to the government’s web site and apply online at www.loanconsolidation.ed.gov.