There's good news and bad news for people looking to consolidate their federal student loans into fixed-rate loans this year.
Borrowers are poised to enjoy the largest historical drop in interest rates
if they wait to consolidate until after July 1, 2008. That's the good news!
The not-so-good news is that finding a company to consolidate your loans may be very difficult. Sallie Mae -- the largest consolidator -- has pulled out of the market, along with 7 of the other top 10 student lenders.
What's going on here?
First off, consolidation loans have always carried a small profit margin for lenders. To complicate matters, economic realities are taking their toll on the student loan market.
Student loans are funded by bonds or securities -- the trading of which has been hurt by our slowing economy and the housing crunch. As a result, the market as a whole is drying up -- with some states like Michigan having completely shut down their student loan programs.
So right now the government may be the best (and only!) option for consolidation. Check out your options at
LoanConsolidation.ed.gov.
Below is a quick cheat-sheet so you know what to expect.
Please note that these numbers are approximate until July 1. And remember that your actual lock-in rate will be slightly higher because it's a weighted average of the loans you're consolidating, rounded up to the nearest one-eighth of one percent.
| Loan Type | Current Rate | Rate After 07/01/2008 |
| Stafford | 7.25%
(if taken out after 07/01/06) | 3.625%* |
| Stafford | 6.62%
(if taken out before 07/01/06) | 3.61% |
| Plus | 8.02%
(if taken out after 07/01/06) | 5.01% |
| Plus | 7.9%-8.5%
(if taken out before 07/01/06) | 7.9%-8.5% |
Sources: TheStreet.com and
The Wall Street JournalHot Tip! A reduced interest rate on new subsidized federal Stafford loans for undergraduate students will be phased in over the next five years. The current rate of 5.6 percent (accurate as of July 2009) will drop to 4.5 percent in July 2010 and 3.4 percent starting July 2011!
