Consolidate your student loans now

By MarketWatch

Former students who consolidate their federal student loans can now get a good education in saving money.

Consolidation rates for federal student loans with variable interest rates -- Stafford and PLUS loans originated before July 1, 2006 -- are now at the lowest levels in their history.

By consolidating, borrowers can lock in low rates for the duration of their repayment, potentially saving thousands of dollars in interest payments.

"For someone who has these loans, this is perhaps their last opportunity to get a historically low rate because I doubt it's ever going to get this low again," said Mark Kantrowitz, the publisher of financial information sites FinAid and FastWeb.

Save thousands

Student-loan consolidation wraps a borrower's federal education loans into a single fixed-rate loan. Since the rates dropped July 1, borrowers with Stafford loans who consolidate during the grace period before payments begin can lock in a rate of 2%; Stafford borrowers who consolidate once their loans are in repayment can secure a rate of 2.5%. PLUS loans, which are originated by the parents of undergraduate students, can be locked in at 3.38%.

When locked in, those lower rates can potentially save thousands of dollars in interest over a loan's repayment period, Kantrowitz said.

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For example, a $20,000 Stafford loan on a standard 10-year repayment with a 6.8% interest rate would require a monthly payment of $230, and the total interest paid over the life of the loan would be $7,619, he said.

But if a borrower locked in a 2% interest rate, payments on the loan would be $184 a month, and total interest paid would be $2,083 over the same 10 years. The lock-in at 2% would mean a 20% lower monthly payment and overall savings of $5,536 in interest, Kantrowitz said.

The amount a borrower can save by locking in a lower rate depends on several factors.

"A lot depends on how many dollars of loans they have at the variable rate and whether they're doing it on a 10-year term, extended repayment or other repayment plan," Kantrowitz said.

Where to apply

Because most student lenders are no longer providing federal education loan consolidation, Kantrowitz said, borrowers looking to consolidate should do so through the Federal Direct Consolidation Loans program at the U.S. Department of Education.

Borrowers can apply for a consolidation loan here, and anyone thinking about consolidation who has questions should go here to learn more about the process and where to start, said Stephanie Babyak, a Department of Education spokeswoman.

"It runs through a checklist of whether consolidation is something that you as a borrower might want to consider, what's involved and how to go about it," Babyak said.

Continued: Are you eligible?

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