If you are a recent college graduate and have student loans, then make sure you read this. Consolidating your student loans will lock them into a rate and remove the possibility that your variable rate will move up. Since rates are based on the Fed, there is a high probability they will move up in the coming years.
With rates as low as they are, make sure that you consolidate your student loans during your grace period. Unfortunately I was a couple months late in this process and did not get to take advantage of as low rates as I could have (my rate is still excellent though).
When you consolidate your student loans, they take a weighted average of your rates and that becomes the new rate for the consolidated loan. This forms the basis of your initial rate, but there are a couple ways to save even more on interest.
- Consolidate during your grace period. With student loans there is usually a couple month (6 months or so) grace period before you are required to begin paying back your loans. This gives you time to find a job, etc. In my case, the company consolidating the loan will give you 0.6% off your rate if you consolidate during this time. This translates into significant savings over the life of the loan.
- Enroll in direct debit. If you setup your bank account to pay the loan each month, you can usually saving 0.25%.
- Make on-time payments. By making 36 on-time payments, I am able to saving 1%.
So where does that put me? I started out with a rate of 3.375% based on the weighted average of my loans rounded to 1/8th percent. I missed the grace period consolidation, so I didn’t get that discount. But I have enrolled in direct debit and will be making 36 on-time payments. That makes my rate 2.125%. My rate is lower than my ING Direct account. And if I were a bit more optimized, I could have consolidated during the grace period and had a rate of 1.525%! That’s an incredible rate.
Based on this, I extended my loan to 15 years (instead of the normal 10) so that I can take advantage of this rate for as long as possible. What this really says is that if you are smart about your loans and even if you have money for college, take as many low interest government loans as possible. Take the cash that you do have for school and put it into the market or an ING account. Then when you are done school, consolidate your loans at historically low interest rates. Of course this example is so extreme because of the current rates, but it serves as a very good example.
Comments (5)
the 36-months thing only apply if you have more than 20k in loans, and when I consolidated, I only had 18k left. man why did I not take finance in college :(
That’s interesting. I think the 36-months on-time payment should apply even with less than 20k.
http://www.aesloans.com/consolidation_loans/aes_discounts.htm
While consolidating loans is a wonderful idea, especially given the current, historically low, interest rates, I am not sure I am comfortable with the idea of essentially taking out a loan in order to invest (i.e.”even if you have money for college, take as many low interest government loans as possible. Take the cash that you do have for school and put it into the market or an ING account.”).
Rather than do what most “normal” Americans do, if you have the money to pay for school with cash, DON”T take out loans. Just my opinion - debt is evil.
I think this only applies to federally insured student loans. My kids didn’t qualify, so they took loans through our bank, which my wife co-signed. Now, we get constant offers of consolidation but when we call, we never qualify.
Does anybody know of a consolidation program for people who did NOT get federally insured student loans?
HomefrontSix,
I think this depends on how disciplined you can be with a substantial amount of money (in other words, you have to trust yourself not to blow it :)). Not always an easy task. A rate like 2.125% is historically difficult to obtain and is substantially better than any mortgage that you will be able to get. Here is a perfect example:
Assume that you have enough money for school but you can get low interest loans. You take out the max in loans and put that same amount of money into an ING account immediately (you could argue the market, but we’ll take the conservative approach). When you get out of school, you consolidate at a fixed rate and decide to buy a house. Now you are in a position where you have a very low interest loan, and using the money in the ING account can take out a smaller higher-rate mortgage. Also, your federal loan may have been a deferred loan, so you were not charged interest during school but were making money in the ING account.
–OL
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