Time To Save On Student Loans

Ray Martin Explains How To Lock In A Low Rate Now

(CBS)  Former college students and their parents currently have what may be one of the best opportunities to save money on student loans.

At the center of this opportunity is anticipation that the interest rate that applies to consolidation loans – a fixed-rate loan that replaces the variable rates of the existing student loans – is set to rise this summer. To help you decide how to act, financial adviser Ray Martin visits The Early Show.

Under a federally subsidized program, every July the Department of Education sets a fixed rate that applies to consolidation loans for the following 12 months. The fixed rate is tied to an index of the 91-day Treasury Bill rate at the end of May each year. That rate is approximately 2.85 percent, which is over 1.75 percentage points higher than it was last year. This means that the fixed rate that applies to loans consolidated after June 2005 could be approximately 5 to 6 percent, versus 3.37 percent for Stafford Loans and 4.17 percent for PLUS Loans consolidated before July 2005.

Through a transaction called "loan consolidation," individuals with qualifying student loans can lower their monthly payments by as much as 50 percent, refinancing their variable rate student loans into a single loan and locking into one of the lowest fixed interest rates seen in a generation.

Students and parents who have education loans, such as Stafford loans and PLUS loans, can refinance, or consolidate multiple loans into a single loan, with a single lender, with a lower monthly payment, at a low fixed interest rate, that’s good for the life of the loan. That’s a bargain when you consider that the variable rates for Stafford loans that are not consolidated can adjust to a maximum of 8.25 percent and up to 9 percent for PLUS loans, which is about where variable rates for these loans were just six years ago.

The only cost to consolidating student loans is that the interest rate for the consolidation loan is rounded up the next highest one eighth of a percentage point. For example, if the weighted average for your loan rates to be consolidated is 3.39 percent, the consolidation rate will be 3.5 percent, which could add an additional buck or two per month to your current payment, but you will have peace of mind knowing that the interest rate is fixed for the life of your loan.