Pay Back Student Loans for Less

Consolidate your debt after July 1 and lock in big savings.

You could be in for a big break if you still owe money on Stafford student loans with a variable interest rate. Your rate will adjust on July 1, based on the 91-day Treasury-bill rate at the end of May. That will dictate what you'll pay for the 12 months that follow, and the rate on Stafford loans could drop by as many as three percen-tage points, to 4.25%. You can lock in the new rate by waiting until July 1 and then consolidating your loans into a single loan with a fixed rate.

A few years ago, such consolidations represented a midsummer ritual as borrowers refinanced their student loans to lock in rates at lower than 3%. In July 2006, however, a new law fixed the rate on new Staffords at 6.8% and prohibited students from consolidating while they were still in school. Now, graduates who passed up the chance to refinance before the July 2006 changes get another opportunity to lower their rate significantly.

Students who graduate this year probably hold both variable-rate and fixed-rate loans. Consolidating won't bring down the rate on the fixed-rate Staffords, so you're better off consolidating just the variable-rate loans.

You won't be charged a fee to consolidate, but refinancing sometimes has costs. For instance, if you have been given a rebate or fee waiver on your loans, the lender may require that you repay it if you refinance. Still, the prospect of an interest-rate drop of one percentage point or more generally makes consolidating worthwhile, says Mark Kantrowitz, of Finaid.org.

No more perks. Until recently, lenders offered discounts and rebates on new Staffords and consolidations, the better to attract business. But a new law has made federal student loans, including consolidated loans, less profitable, so banks and other private lenders have dropped most of the enticements. Some private lenders are downplaying their consolidation business or eliminating it altogether. Those who do make the loans will likely require a minimum loan balance of $10,000. If your loans add up to less, you can consolidate through the federal Direct Loan program, which doesn't set a minimum. Keep in mind that borrowers who have consolidated once can do so again only if they have taken out another loan.