Consolidation Can Be Consolation

By Michelle Singletary
Thursday, November 16, 2006; D02

Class of 2006 college graduates, listen up. It's been almost six months since you left school. During this time, you haven't had to pay a penny on your student loans.

That, as you know, is about to end.

Graduates typically get a six-month grace period after leaving school before their first student loan payment is due.

Soon the reality of all that debt is coming home to roost.

"This is a critical time for looking at your student loan payment situation. If you need monthly rate relief, go ahead and consolidate," said Patricia Scherschel, vice president of loan consolidation at Sallie Mae, one of the country's largest student lenders.

A consolidation loan allows you (or your parents, if they have a federal PLUS loan) to combine several types of federal student loans with various repayment schedules into one loan with one monthly repayment at a fixed rate. Your payments can be stretched from the standard 10 years to as long as 30 years, depending on your debt amount.

If you want to consolidate your loans at a lower rate, remember that it's a limited-time offer. You have just 180 days -- including holidays and weekends -- from your "separation date" to capitalize on the 0.60 percent interest rate reduction given to borrowers who consolidate their loans during the grace period.

What's your separation date? That is the official date on which someone graduates, leaves school or drops below half-time status. It may be your last day of class or your graduation day, Scherschel said.

If you don't know your separation date, check first with your lender. You can also find details of your student loans by going to the National Student Loan Data System ( http://www.nslds.ed.gov).

The separation date is important to know because if you consolidate your student loans during your grace period, you get the lower rate, which is based on the grace-period rate and is currently 6.54 percent for Stafford loans issued from July 1, 1998, through June 30 of this year. If you hesitate (or procrastinate), and don't consolidate before the 180 days are up, the variable Stafford loan rate jumps to 7.14 percent.

The rate you end up with can be different from the variable rate, because when you consolidate, you lock in the weighted average of all your student loans, rounded up to the nearest eighth of a percentage point. If you consolidate after your grace period, you get a fixed rate of 7.25 percent. Do it before and you can lock in a rate of 6.625 percent.

And what a difference that can make.

Let's say you have $20,000 in Stafford loans. If you consolidate you get the in-grace rate of 6.625 percent. With that much debt you can stretch your payments to 20 years and lock in a monthly payment of $151. If you took the full 20 years to pay off the loan, your total interest payments would be $16,142.

If you miss the in-grace consolidation window, your monthly payment would be $158 and your total interest payments would be $17,938. By consolidating during your grace period you save $1,796.

There's another plus to consolidating. Many lenders will offer further rate reductions under certain conditions. For example, Sallie Mae will drop your rate to 6.375 percent if you elect to have your payments directly taken out of a savings or checking account. If you make your initial 36 payments on time, you can further reduce your rate to 5.375 percent. With those two rate reductions, you can save about $4,400 in interest and reduce the 20-year repayment term by nearly 2 1/2 years.

Before you settle on one lender, shop around for the best terms. It used to be that if all your loans were with a single lender, you were stuck with that company if you wanted to consolidate. That is no longer the case. The single-holder rule was abolished this year. Now no one has an excuse not to comparison-shop.

Like many lenders, Phoenix-based NextStudent Inc. offers a rate reduction for on-time payments. Borrowers receive a 1 percent rate discount after their first 36 consecutive on-time payments. But unlike many other such deals, the rate is locked in for the life of the loan. Many lenders snatch back that rate reduction if you need to reduce your loan payment, postpone paying on it, or if you miss a single payment.

The College Loan Corp., headquartered in San Diego, offers a cash rebate for on-time payments. If you have a minimum of $50,000 in loans and make your monthly payments on time for nine consecutive months, you can get a cash rebate equal to 2 percent of your consolidation loan balance, up to $2,000.

Scherschel also said that if you applied for a consolidation loan by June 30th when consolidation rates were even lower -- 4.75 percent for those in the grace period -- you should check with the lender to see if you still qualify for that rate. "We have the ability to use the rate in effect the day the application was submitted," Scherschel said.

Of course, the biggest downside to consolidation is the extra interest you pay by stretching out your loan payments. But since there is no prepayment penalty and no application, origination or processing fees, why not lock in as low a rate as you can get? You can always pay off the loan early, something you should strive to do anyway.

· On the air: Michelle Singletary discusses personal finance Tuesdays on NPR's "Day to Day" program and online athttp://www.npr.org.

· By mail: Readers can write to her at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071.

· By e-mail:singletarym@washpost.com.

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