Time almost up to cash in on low interest rates

Current university students could save hundreds or thousands of
dollars by consolidating their student loans in order to lock in
the historically low interest rates.

Economic experts predict that current interest rates of 2.77
percent will jump about 2 percent after this year’s 91-day
treasury-bill auction in May.

The increase will mark the end of a period with the lowest
interest rates since the beginning of the student loan program in
1965, and students can maintain this rate by consolidating their
loans before July 1, when the new interest rates will take
effect.

While the savings to undergraduate students will be
considerable, the savings of consolidating loans to graduate
students will be much greater due to the larger amounts most
graduate students take out.

“For undergrad students, this would save a few hundred or
even a thousand dollars, but for graduate students, this savings is
gigantic,” Kristof said.

“I don’t even know if ever in the history of the
student loan program have interest rates been rising as fast and
furiously as they are now.”

The interest rates on student loans are determined by the yield
set of the 91-day treasury-bill auction. The treasury bill is a
U.S. government-issued contract in which the government promises to
pay a lender the amount of a loan plus interest that accumulates
over 91 days.

“The auction allows various capital markets from around
the world to bid on the price that they will offer for the T-Bill
(treasury bill). Because the U.S. government is such a big
purchaser, their interest rates or yield sets come out quite
low,” said Nancy Coolidge, who handles government relations
on student aid for the University of California. The government
then adds 1.7 percent to the interest rates determined by the
auction, and this becomes the interest rate for student loans.

The interest rates at the auction may increase drastically in
part due to the fact that they have been at record lows for the
past few years.

“The federal reserve has been hiking up interest rates all
year, more or less, to stave off inflation. To some extent,
what’s making interest rates rise so high is that they were
so low before. These rates are the lowest in the history of the
student loan program, so people in school right now are
particularly lucky that they happened to catch them,” said
Kathy Kristof, author of “Taming the Tuition Tiger” and
“Investing 101.”

While the process of consolidating loans for students graduating
in June of that year has always been legal, the U.S. Department of
Education legalized last Monday the consolidation of loans by
non-graduating students.

Students not currently paying back their loans have to use a
loophole in the student loan system in order to consolidate their
loans because consolidation cannot technically be done unless the
student is currently paying back the loan.

“If you’re not graduating, you have to call your
lender, ask them to put you in repayment, immediately ask them to
defer your loan, and then consolidate it right away before the end
of June,” Coolidge said.

The federal loan program used at UCLA ““ the Federal Family
Education Loan Program ““ is a program in which the government
pays banks and commercial enterprises to loan students money. Other
schools use a direct loan program where the money for the loans
goes to students directly from the national treasury. The
consolidation legalized Monday by the Department of Education
applies only to the Federal Family loans.

“What will happen now is that there will be fairly
aggressive marketing by organizations that say, “˜Consolidate
with us.’ Borrowers need to take a look at all the different
features in order to make sure that they get the best deal that
they can,” said Brett Lief, president of the National Council
of Higher Education Loan Programs.

Though consolidating loans will save most students money in the
long run, there are downsides to the process. Consolidating
requires that students give up the grace period that variable
interest rate student loans have. This grace period allows students
to not begin paying back their loans for six months after
graduation, giving them time to gather resources before repaying
the loan.

In addition, the process is not reversible, so if interest rates
do become even lower in the future, borrowers will be forced to pay
the interest rate at the time of the consolidation of their
loan.

Kate Rube, a higher education advocate for California Public
Interest Research Group, said, “It’s a good option for
students to have, but it may not be the right thing for everyone to
do right now.”