A federal act to cut costs will raise student loan interest rates starting July 1.
Because of the raise, consolidating loans before July 1 is a smart move, said Financial Aid Associate Director Val Meyers. The Office of Financial Aid has received more phone calls and Web site hits than usual from concerned parents and students eager to consolidate before the switch, she said.
Consolidating a loan entails either refinancing one loan or combining several federal student loans with one fixed interest rate.
Dictated under the Deficit Reduction Act passed in December 2005, student loan interest rates will change from a variable interest rate to a fixed interest rate, meaning rates will rise from 4.7 percent to 6.8 percent.
Meyers said many students don't see the effect interest rates have on their pocket books until after college.
"I don't think they understand how much interest compounded over years and years and years adds up," she said.
Variable interest rates are determined by the treasury bill interest rate, which is set every July 1. For these rates, if the treasury bill interest rate was high, so were student loan interest rates. There was a cap of 8.5 percent, so if the treasury bill interest rate ever exceeded that, students wouldn't have to worry, she said.
For the past several years, the interest rate has been low, so student loan interest rates have been significantly lower than 6.8 percent, Meyers said.
Political science senior Julielyn Gibbons said she does not agree with the legislation because of how it could affect, not only students, but the Michigan economy.
"I think it's going to make it increasingly more difficult for students to be able to be more sustainable members of the economy because they will be paying such higher interest rates and less of their hard-earned money," Gibbons said. "It's definitely not a bill designed to make life easier for students."
Step 1 To consolidate or not to consolidate, that is the question...
According to the Office of Financial Aid Web site, these are the student loans that can be consolidated:
Guaranteed Student Loan (GSL)
Federal Supplemental Loan for Students (SLS)
Federal Subsidized Stafford (FDSL or FFEL)
Federal Unsubsidized Stafford (FDSL or FFEL)
Federal Perkins (formerly National Direct Student Loan)
Health Professions Student Loan (HPSL)
Loans for Disadvantaged Students (LDS)
Nursing Student Loans (NSL)
Health Education Assistance Loan (HEAL)
Consolidation Loans (either FDSL or FFEL)
Before making any major financial decisions, students should seek out a financial aid officer for advice. Not every student has the same financial situation, so each should be dealt with on an individual basis, Meyers said.
Since student loan interest rates will be fixed after July 1, Meyers said students may want to think twice about consolidating after the change. The opportunities to save money through consolidation could be fewer, she said.
"For MSU students, consolidation is something you want to think about carefully," Meyers said. "There are benefits for some people that will outweigh the downside."
Step 2 Collect background information
• Have your student loan record readily available to start the consolidation process. If you are unsure about your borrowing history, go to the National Student Loan Data System Web site and enter your federal Personal Identification Number, or PIN. You can also find your lender's name and address here if you don't already have it: http://www.nslds.ed.gov/nslds_SA/.
• Have two personal references, including their addresses and phone numbers, ready for your application.
• Your Social Security number is your loan account number.
Step 3 Research
Gibbons said she shopped around and visited several companies on the Internet before settling with a private consolidator.
"When you're considering how much money we're talking about, it definitely is worth the half hour to hour in researching who will give you the best deal," she said.
Gibbons said the process of consolidation has gotten easier, especially with the number of letters and e-mails she's received from companies prompting her to consolidate.
"Overall, I think compared to what it has been and what it could be, it definitely has improved," she said.
With only a few days before the fixed rate takes over, students will have to move fast if they want to potentially save thousands.
"I think students do have to take initiative," Gibbons said.
Step 4 Plan ahead
• Choose a repayment plan that will work for you, but realize you can change it later if you need to.
• Plan for the consolidation to take about 30 to 60 days to complete.
You can add other loans to your consolidation loan at the current interest rate until June 30, but loans added after this date will be subject to the 6.8 percent interest rate.
While students are in school, the current interest rate is 4.7 percent. Once students hit repayment status, their interest rate will be slightly higher. Meyers said an interest rate increase will no longer occur with the fixed interest rate — it will stay at 6.8 percent regardless of whether students are in or out of school.
"It's my perception that people aren't thinking about repayment, and it's understandable because they're thinking, 'How do I get through school?'" Meyers said.
Step 5 Re-evaluate
• Check your consolidated loan summary after you receive it to ensure the loans you wanted to consolidate match what is documented — if they're different, bring it up with your lender.
The Deficit Reduction Act is a federal move to cut costs in 10 different areas, including education, from 2006-2010.
"The Congress decided this was a good way to manage their funding needs," Meyers said. "Would I prefer that students had to pay lower interest rates? Of course."
According to the Congressional Budget Office cost estimate for the Deficit Reduction Act of 2005, $11.9 billion in government savings comes from cuts to higher education programs.
The largest portion of the $35 billion the U.S. House of Representatives and Senate predict to save comes from the change in the student loan programs. These savings were planned for a five-year projection — $29 billion is expected to be saved from education cuts over a 10-year period.
Sen. Carl Levin, D-Mich., voted against the Deficit Reduction Act on the basis that "this misguided budget reconciliation conference report would make things worse," according to his Web site.
In his floor statement on the Budget Reconciliation Conference Report on Dec. 21, he argued against specific budget cuts, including the student loan interest rate increase.
"In the fight for global competitiveness, a highly educated workforce is one of America's best assets," Levin said. "It is shortsighted to cut investments in education."
Gibbons said she can see both sides' views on the legislation but wishes students were taken into consideration.
"Maybe they should have talked to more students and had more student perspective instead of the financial world, who always stands to gain from things like this," she said.
