Got student loans? Refinance now or pay more

July 1 is the deadline for getting that lower rate If you've waited to consolidate the student loans you took out in college, procrastinate no longer. Come July 1, rates on existing loans are expected to jump at least 1.5 to 2 percentage points. Plus, a loophole that allowed students to consolidate while still in school and lock in a special low rate will be closed permanently.

By acting before July 1, students still in school or in the six-month grace period after graduation can secure an annual interest rate on their federal Stafford loans at 4.75 percent for the life of the loan. Students out of school can get a rate as low as 5.375 percent. Parents who have taken out federal PLUS loans to finance their children's education can lock in a rate of 6.125 percent. If you choose not to consolidate, your rates will surely jump. Since the new rates will be calculated from the rate of Treasury bills at the last auction in May, plus 1.7 to 3.1 percentage points (depending on the loan), and rounded up to the nearest one-eighth percent, there's no way of knowing now exactly what rates will be in July.

But based on the most recent Treasury auction in April, the annual rate would be 6.5 percent for loans in the grace period, 7.125 percent for loans in the repayment period, and 7.875 percent for PLUS loans. A student who consolidated a $30,000 loan at 4.75 percent during the grace period would save more than $3,000 over a 10-year loan period. Students still in school or in the six-month grace period are prime candidates for consolidation.

By asking that their loans be put into repayment status early, they can consolidate at the lower in-school rate of 4.75 percent and then ask that the repayment period be deferred until graduation. (Students who do this may lose their grace period, however.)

FIXED RATES FOR NEW LOANS

Future student loan borrowers will also have something to chew over, as a new federal law aimed at simplifying the student loan system and curbing the federal deficit mandates that beginning July 1, all new loans will carry a fixed rate, instead of the current variable one. Stafford loans will be set at 6.8 percent for all new loans through 2012. There's no telling whether that rate is good or bad because nobody knows where interest rates will trend. The rate on PLUS loans, which will also be available to graduate and professional students as of July 1, will jump from 6.1 percent to 8.5 percent. (Due to an oversight in the law, federal direct PLUS loans were fixed at 7.9 percent, though Congress may change that.) At this point, private loans and home equity loans--which are currently averaging 7.98 percent and 8.08 percent, respectively, according to BankRate.com, a financial data information Web site--may be attractive alternatives, especially if you have the stellar credit needed to get the best rates. What's more, you may be able to deduct some of the interest on such loans.

TIPS FOR CONSOLIDATING

Keep your loans short-term. When you consolidate, your lender may offer you a repayment period of up to 30 years, which could cut your monthly payments by as much as 50 percent or more. But don't be tempted. Stretching out the life of your loan will result in dramatically higher total interest costs. Say you're lucky enough to consolidate a $30,000 loan at 4.75 percent. If you keep the loan term to 10 years, your interest payments would be $7,745. But if you stretch it out to 30 years, you'd pay $26,340. So unless you have immediate needs, are trying to save cash for a house, or are between jobs, keep the shortest term you can stand.

To see how much interest you might pay over different loan terms or to compare the benefits of consolidating, try the online calculators at FinAid.org (finaid.org/calculators) or Citibank (studentloan.citibank.com/slcsite/fr_calc.htm). If you do need to stretch out your loans, get ahead on your payments by putting down more than the minimum due each month. Extra money you pay may be applied to your principal, thereby reducing your future interest.

With some financial institutions you need to specify that the money should be applied to the principal so the future interest will be reduced. Take advantage of loan incentives. Lenders regularly offer a 0.25 percent reduction if you have your payments automatically deducted from your checking account and a further 1 percent off if you make all your payments on time for the first 36 months. Apply immediately. Student loan applications must be received by the lender by June 30, not simply postmarked by that date. If you apply online you will get date-marked confirmation of your submission. Weigh your options.

If you have a direct student loan through the federal government, go to loanconsolidation.ed.gov to see your options. If your federal loans are handled through a private company such as Sallie Mae or Citibank, contact them. When your loans are consolidated, you will receive the weighted average of the interest rates of all your loans, rounded up to the nearest one-eighth percent. Even if you have only one loan, you may be able to consolidate it. If you have loans with only one lender, you cannot use another lender to consolidate. But if you have loans with multiple lenders, you can choose which one to consolidate with or even use an entirely new lender with better incentives.

For instance, California nonprofit lender, ALL Student Loan (www.allstudentloan.org), offers qualifying California residents, or students at California institutions, a choice of either a 1.25 percent reduction for making their first 24 payments on time or a credit for the first 12 months' interest for making their first 12 payments on time.

Source: http://www.consumerreports.org/cro/personal-finance/student-loans-refinance-now-or-pay-more-406-student-loans-financial-aid.htm