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Students nearing deadline for hike in loan rates

WASHINGTON—Luis Campillo, a Brown University alumnus with $25,000 in student loans to repay, is unsure whether to consolidate them before the interest rates on such loans go up. And he—along with millions of other college students and graduates—has less than a month to figure it out.

It's a big decision, because the historically low interest rates for student loans will increase by 1.93 percentage points after June 30. That's the biggest annual increase since 1980.

"I'm thinking about it," said Campillo, 23, who's deferring some of his loan payments right now. He'd have to start paying them off if he consolidates, and he worries that he isn't making much money as a fellow at the Congressional Hispanic Caucus Institute in Washington.

Consolidation allows borrowers to lump multiple loans into one with a pre-July interest rate. Depending on how students and graduates choose to repay their consolidated loans, they could save thousands of dollars in interest or pay them back over a longer period.

The 1.93 percentage-point spike reflects an increase in the Treasury bill rate that interest rates for federally subsidized Pell and Stafford loans are pegged to. Interest rates for the Parent Loan for Undergraduate Student program also will go up 1.93 percentage points.

Only borrowers who have at least one loan from the Stafford or the PLUS program can consolidate. In addition, most institutions require borrowers to have at least $7,500 in loans.

About 85 percent of the 1.4 million people who were eligible to combine their loans in the 2003-2004 academic year did so, said Mark Kantrowitz, a college financing adviser in Cranberry Township, Pa., who runs finaid.org, a Web site for student loan advice.

He expects the number of consolidators to increase by at least 1 million this year because of the imminent interest-rate hike and a recently clarified education-law rule. It allows students attending college to combine their loans.

"They want to lock into the low interest rates," Kantrowitz said.

There are some drawbacks to consolidation.

If a borrower consolidates during the grace period that recent graduates typically get, he or she must begin repaying the loan immediately, Kantrowitz said. Also, the government won't subsidize interest payments for Perkins Loan recipients who consolidate while in school. Perkins borrowers get federally financed loans through their colleges, with the government covering the interest while they're in school.

One of the challenges, Campillo said, "is that there's a lot of information out there," enough to fill his mailbox with consolidation offers.

For borrowers such as Campillo who are uncertain which offer to choose, Kantrowitz recommends big established lenders. The government-run Sallie Mae is the biggest consolidator of federal loans, followed by Bank One, Citibank and Bank of America.

Eleanor Spivey, 21, a recent graduate of Colgate University who lives in Washington, said she was ignoring the "spam mail" she was getting from smaller lenders and probably would consolidate at Bank of America. "I'm confident with them as my lender," said Spivey, who owes $11,000 and who attended a rally Tuesday on Capitol Hill at which speakers urged students to consolidate.

Campillo, who's originally from Colombia and grew up in Pawtucket, R.I., said he was "70 percent sure" that he'd consolidate.

``I'm a little worried, but not too much," he said.

For some counsel on consolidating loans, go to www.finaid.org.

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(c) 2005, Knight Ridder/Tribune Information Services.

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