Loans Answers

Student loan rates

Question: Sounds like you have gotten yourself into some debt there.

Going back to school will certainly give you new student loans at a rate lower than 8.75%, but consolidating with new loans will not lower your interest rate on your current loans.

See, consolidation doesn’t really lower your rates, it merely takes all your loans and lumps them into one payment. Here’s a specific example: Say you have your current $50K in student loans at 8.75%. You go to school for one semester and take out another $7,000 at 5%. You seem to think that if you consolidated these two loans together you would end up owing $57K at aprox. 7%. But this would not be the case. The percentages are weighted according to how much money you owe, so your final cost after consolidation would probably be $57K at 8.5% or something like that. Consolidation will not save you interest at this point.

Answer: This is not true. The method for calculating rates for all student loans including consolidation loans are set down by federal law.

For Consolidation Loan applications, except for HEAL Loans the interest rate will be the weighted average of the interest rates of the loans being consolidated (excluding any HEAL Loans) rounded up the nearest 0.125% or 8.25% whichever is less. This is a fixed rate for the life of the consolidated loan.

You cannot factor what a person’s interest rate would be if they consolidated one or two years from now as the interest rates for federal student loans is variable by 12-month period and is set each July 1st by a rate equal to the 91-day Treasury Bill auctions for the quarter ending June 30th, plus 3.0%

Student loan rates vary each year, and it is not a factor of just how much money a person owes that would effect their consolidation. It is also what he current interest rate is when the application is approved.

Also previous loans are not actually “lumped” into one loan. The individual loans are paid off totally and one new large loan (with a longer repayment period) is created. It is hoped that the person would take advantage of the lower monthly payments not realizing or caring they are paying more in interest because they are taking longer to pay off the loan.

I like to look at Consolidation Loans almost like a 30 year mortgage with no prepayment penalty. You can take the entire 30 years to pay off the loan, but you will pay more in the long run, but if you pay it off in say 15 years you’ve saved yourself a nice bit of money.

So unless you are Mr. Greenspan or have a crystal ball and predict with accuracy the above interest rates there is no way to predict future consolidation interest rates. This is the reason so many people are locking in low rates now, because federal student loan rates have never been this low before (3.5% for some) and are likely not to go lower still. Unless of course the economy tanks further and the Federal Reserve lowers interest rates yet again.

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