Focus on Finance: Some student loan rates set to fall on July 1st

Focus on Finance: Some student loan rates set to fall on July 1st



The U.S. Department of Education recently announced that interest rates on variable rate student loans will drop by 3% on July 1st. That's the good news. Whether you are able to benefit from this annual rate set is another question. Monday morning on KARE 11 First Edition, Dan Ament with the Ament Consulting Group at RBC Wealth Management, discussed student loan consolidation.

FAQ'S ON STUDENT DEBT CONSOLIDATION



Variable vs. Fixed rate student loans - Congress set a fixed rate for Stafford and PLUS loans originating after July 1, 2006. If your loan originated before that date, you had a variable rate loan. Recent grads could very well have both types of loans outstanding. The rate change announced affects the variable rate loans issued before July 1, 2006. That rate will drop from 6.62% to 3.62%. Unfortunately, the fixed rate loans issued after July 1, 2006 will not see a similar adjustment.

How often do variable Federal student loan rates change? Federal student loan rates are adjusted every July 1, based on rates for short-term Treasury bills, which have been rising all year. The rate used for the July adjustment is determined by the Treasury auction in May.

Does the rate on my consolidated loan fluctuate or is it locked in? When you consolidate Federal student loans, you turn a variable-rate loan into a fixed-rate loan under the federal student loan program. You can lock in the interest rate for a repayment period up to 30 years. When you consolidate, you lock in the weighted average rate of all your loans. By extending the term of the loan, you reduce your monthly payments, a useful feature for recent grads with little extra cash. You can always increase your payments later: There are no penalties for paying off your loan early. Note that privately-backed loans are not eligible for consolidation under the Federal program. They can, however, be consolidated but at a variable rate plan.

Who should consolidate? Not everyone can consolidate. First, the Federal Consolidation Loan Program pertains to Federally-backed student debt only. Most lenders require a minimum of $7,500 in loans, and some set the minimum balance at $10,000. You are only permitted to consolidate your loans once.

The Credit Crunch has affected the student loan market too. Understand that the landscape of lenders that was once available and competing for student debt offerings has dwindled significantly. If you are pursuing a loan consolidation for your variable rate loan portfolio
Loans outside the box. Traditional student loans are not the only way you can secure funds to pay for college. There are alternatives but with each comes additional risks.