Grace period for student loan consolidation is ending soon

If you have recent graduates in the family, remind them that they have very little time left to lock in a fixed rate on student loans they want to consolidate.

Student loan rates fluctuate, and as interest rates have been rising, so have student loan repayment rates. Locking in a rate fixes the repayment amount for the life of the loan.


The urgency is caused by a grace period that is soon ending on subsidized Stafford loans. The day after students "separate" from school, subsidized Stafford loans enter a 180-day "grace period" during which time the borrowers can consolidate their loans and lock in a fixed rate by doing so.

You can even lock in a rate on a single loan by "consolidating," even if you have no other Stafford loans, and you can also consolidate non-Stafford student loans. Subsidized Stafford loans are needs-based federal loans.

For students who graduated last May, the grace period ends in November, exactly 180 days after their graduation date.

The current lock-in rate of 6.625 percent will go up to 7.25 percent if the student is even one minute late in applying to consolidate. To help students meet the deadline, applications can be filed - and time stamped - online.

A popular consolidation program, called "Smart Loan," is run by Sallie Mae, the nation's leading provider of saving and paying-for-college programs, and the No. 1 provider of consolidation loans. The minimum balance for consolidation by Sallie Mae is $5,000.

At 6.625 percent, the lock-in rate is higher than the current repayment rate of 6.54 percent, which applies to all Stafford loans issued July 1, 1998, through June 30 this year.

Each year in July, the repayment rate is reset. If interest rates rise, repayment rates can be expected to increase next year. On the other hand, if interest rates decline, repayment rates will too.

While the lock-in rate is higher than the current repayment rate, locking-in during the grace period is far smarter than locking-in after the grace period, when the rate jumps to 7.25 percent.

To run some what-if calculations on possible repayment schedules, I highly recommend using the SallieMae loan consolidation calculator by visiting www.salliemae.com, clicking on "consolidating student loans" and then "estimate your monthly loan payments."

You'll need to know the type, balance and interest rate for each loan you need to repay. Students can find this information on their Sallie Mae accounts online. They call Sallie Mae at (800) 448-3533, Monday through Friday from 7 a.m. to 7 p.m.

The calculator estimates monthly payments for a number of different repayment options. You really need to look at all of them before making any decisions. Here is a sampling.

* Level repayment: Equal installments throughout the repayment period; $50 minimum payment.

* Max 2 Graduated Repayment: Interest-only payments for two years, followed by equal installments; $30 minimum payment.

* Max 4 Graduated Repayment: Interest-only payments for four years and two years of graduated payments, followed by equal installments; $30 minimum payment.

* Income-Sensitive Repayment: Initial payments can be set as low as 4 percent of pretax income or accruing interest.

Loan consolidation is not limited to Stafford loans.

"If you have variable rate student loans that are not consolidated and you are in your grace period, consider consolidating," says Pat Scherschel of SallieMae. Loans that are in repayment, deferment or forbearance, but not in default, are also eligible for consolidation. By consolidating, you can lock in the rate for the rest of your term.

The following loans are eligible:

* Federal Subsidized Stafford Loans

* Federal Unsubsidized Stafford

Advertisement

Loans

* Federal PLUS Loans

* Supplemental Loans for Students

* Federal Consolidation Loans (you must have at least one other eligible loan to consolidate)

* Direct Subsidized Stafford Loans

* Direct Unsubsidized Stafford

Loans

* Direct PLUS Loans

* Direct Consolidation Loans

* Federal Perkins Loans

* Federal Nursing Loans

* Health Education Assistance Loans

* Other federal health education loans (e.g., HPSL and LDS loans)

You may be eligible for private student loan consolidation if you have:

* Private student loans from banks, credit unions or schools

* At least $5,000 in private student loans

* Good credit or a co-signer with good credit

* Graduated from or will be graduating from a post-secondary program.

"Between now and Thanksgiving, be sure to consider consolidating your student loans," Scherschel said.

Who should not consider consolidating? "Don't bother if you have little student debt or you think interest rates will decline," Scherschel said.

Julie Jason, JD, LLM, a money manager and principal of Jackson, Grant Investment Advisers, Inc. of Stamford, welcomes questions for consideration in her column. E-mail her at JJ@JulieJason.com or write to her c/o The Advocate and Greenwich Time, 75 Tresser Blvd., Stamford, CT 06904.