Sixty Second Guide to Stafford Loan Consolidation

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Every year on July 1st, student loan interest rates are announced and with the recent rate drops there have been significant decreases for students if they opened their loans before July 1st, 2006. Before then, all loans were variable rate and loans that were originated then still carry the variable rates. That variable rate will decrease from 7.22% to 4.21%. If you had a loan after July 1st, 2006, sorry but yours was fixed and won’t change.

Student loan consolidation isn’t really a magical trick, you essentially take all of your student loans, figure out your effective aggregate interest rate, and consolidate it into one loan with one monthly payment. Before July 1st, 2006, Stafford Loans had variable interest rates so it would benefit you to consolidate (lock) your loans when the rates are low. I consolidated my Stafford Loans a few years ago at 3.25%, minus some direct debit and timely payment interest rate discounts. So, if you had all Stafford Loans and consolidated them, your rate would be 4.25% (rates are always rounded up to the next eighth of a percent) if you consolidated within your grace period. If you consolidate after that six month grace period, there’s an automatic 0.6% increase tacked on to make it 4.85%.

Finally, this is really just a PSA for folks who are getting new loans. The rate, starting today, falls from a fixed 6.8% to 6% on new Stafford Loans. Loans originated after July 1st, 2009 will be 5.6%, those after July 1st, 2010 will be 4.5% and those after July 1st, 2011 will be only 3.4%.

{ 5 comments, please add your thoughts now! }

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5 Responses to “Sixty Second Guide to Stafford Loan Consolidation”

  1. philip says:

    First the rate is 4.25% for those out of grace period, and if you are in grace period then you get an additional .6% discount so it is 3.625% I believe.

    Another thing is you can only consolidate ONCE! This is important only if the rates drop and you want that lower rate later, you can’t change.

    I am waiting until near July 2009 because that 4.25% will not change until then and I can have a good idea of what rates are before then, based on previous T-Bills.

    I have about 50-50% on variable and fixed at crappy 6.8%, so I am considering consolidating the variables and keeping the 6.8% separate, that way I can pay off that one at a more accelerated pace. I don’t like that it is that high, if I were to consolidate all my loans together it would be closer to 5.25% or so and would lock in that for the entire term of the loan.

    Finally, sorry for the long reply, when you consolidate the loans generally go from the 10 year repayment plan to a 20 year repayment plan. IF you are able to invest that difference then you will come out ahead, but if you would just spend the money anyway, try to continue making the payment to get it finished in 10 years if you can.

    Any questions I have done quite a bit of looking into this and my brother if a Fin-Aid advisor and has given me additional answers.

  2. jim says:

    Philip: Please don’t apologize for long replies, the more information the better. Thanks!

  3. Meagan says:

    It is also important to note that the annual decrease in interest rates is only for new undergraduate loans. New loans for graduate loans are holding at 6.8% (subsidized and unsub) until 2013.

  4. JB says:

    I also consolidated my loans somwhere below 4.0% a few years ago. I pay by autocmatic debit which reduces the interest rate by 0.25%

    I was overpaying every month to get it paid off but stopped when I realized the rate is so low there’s no need to rush to pay it off. Better to save up for my emergency fund, etc.

    My sister is still in school, the interest rate on her loans are 6.5% which I think is really high. hopefully she can consolidate at a lower rate once she graduates.

    I think it’s great the federal government offers many loans for students pursuing their UG degree. I wouldn’t have been able to go to college without them. I have looked into loans for graduate school and they are much less attractive. The Grad Plus loans are at 8.5% fixed rate, which seems high.

  5. philip says:

    @JB Unfortunatly your sister will not be able to consolidate new loans to a lower interest rate. The loans after July 2006 are fixed rate loans. As was pointed out they are reducing the fixed rate but it is changed yearly. So in her case she will have them at that rate for the life of the loan.

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