Managing Your College Loans

When I graduated from college, I took a job as a management trainee in a department store. Why? For the money. The job paid $24,000, double the salary of the editorial-assistant position I really wanted at a magazine. Not surprisingly, I hated it. After three miserable months, I crawled to New York City to accept a different editorial job that paid even less. I could do so only because my parents had sold half the property under our home so I'd get through college without needing any student loans.

I had always appreciated that selfless gesture. And now I realize just how fortunate I was. A Roper survey out this week from Collegiate Funding Services shows that 1 in 5 21-to-34-year-olds said they had to take a job other than the one they really wanted in order to pay off their student loans.

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But there's some good news for those burdened with such obligations. On July 1, many will be able to refinance at a favorable rate. Federal student-loan rates are reset every year on that date, and this year, thanks to six interest-rate cuts in the past 12 months, they are expected to fall to a historic low of about 4%, nearly 2 percentage points below last year's level.

Here's the lowdown. Most students (and parents) who borrow to finance education using Stafford (and PLUS) loans emerge from school with a portfolio of loans, one for each year. They don't necessarily all come from the same lender, nor are they all at the same rate. The formula for Stafford loan interest — a variable rate computed each year — is the 91-day Treasury-bill rate set in the last auction each May, plus a factor. For student loans made between July 1, 1995, and June 30, 1998, that factor is 3.1 percentage points during the repayment period and 2.5 percentage points for borrowers still in school or in the six-month grace period after graduation. For loans made after July 1, 1998, the factor is lower: 2.3 percentage points in repayment and 1.7 percentage points in school or the grace period. (The factor on loans to parents is slightly higher.)

When you consolidate — the industry term for such refinancing — you roll your portfolio of variable-rate loans into one big fixed-rate loan; in other words, you "lock in." Your interest rate becomes the weighted average of your underlying loans rounded up to the nearest one-eighth of a percent. This means that by consolidating after July 1, when the rate on the 91-day T-bill is expected to be around the 1.7% it is today, it is likely you will have the opportunity to lock in at around 4%.

That said, refinancing isn't for everyone. Consolidating generally doesn't make sense for borrowers with just a few years remaining on their loans, since they would stretch out their term and pay more interest. Students with Perkins or Health Professional Loans also need to make sure that consolidation wouldn't void their deferment or cancellation privileges. And it's not an option for borrowers who have consolidated already; you can't go to the well again unless you go back to school and borrow more.

But if you're the typical student, graduating with about $17,000 in federal loans, consolidation is wise. Stretching out the payments while lowering the interest rate can give you the wiggle room to knock down the credit-card bills that inhibit saving. Don't make a move before July 1--unless you apply through a consolidator like Collegiate Funding Services www.cfsloans.com), which is accepting applications that it won't process until then. And although these rates will be in force for a year, if you're in the six-month grace period in which you don't have to pay anything, you have to time things carefully. Consolidating early can bring your respite to an early end. But acting before it expires can save you more than a half of a percentage point in repayment. So bide your time. Then pounce.