BlogToBoom: 5 Tips on Consolidating Student Loans

By Gerri Willis, CNNMoney.com
Be Debt-Ridden

Student loans, credit card bills, home and auto financing add up to debt. How much is too much. When do you save and when do you pay it off? Get all the answers.

NEW YORK (CNNMoney.com) - After July 1, rates on student loans are set to be their highest in six years. But there are steps you can take to limit the damage.

1: Don't wait
If you've been thinking about consolidating your student loans, don't wait. After July 1, interest rates on existing loans are expected to rise 2 percentage points and new loans will have a 6.8 percent interest rate. That's the highest in six years.Students in school or in the grace period can lock in a rate of 4.75 percent. Borrowers who are repaying their loans and have not consolidated before can lock in a rate of 5.38 percent.And parents, you too should consolidate if you have PLUS loans. That interest rate will rise to a fixed 7.94% from 6.1%. According to Sallie Mae, a recent graduate consolidating $20,000 in loans during his or her grace period could save over $5,000 by doing so before July 1. If you don't think you'll be able to get your paperwork in, go online and send in your application electronically. Most lenders have an online presence.2: Do your researchIf you only have one lender, by law you must consolidate with that lender. But if your loans come from multiple sources you can use your leverage to get the best deal.

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Make sure lenders know you're comparing. You can check different consolidation options at finaid.com.While all lenders must charge the same rate, many lenders offer special deals or have special programs. Check out consolidationoptions.com or estudentloan.com to get a sampling of what's out there.Keep in mind the lenders on these sites pay to be there. You may want to consider consolidating with the Federal Direct Student Loan Program because you have the option of an income-contingent payment.If you're not sure who has your loans, go to the national student loan data system at www.nslds.ed.gov

3: Watch the fine print on discounts
Some lenders knock off a quarter of a percentage point off your loans if payments are automatically debited from your account. But some lenders require at least $7,500 in your account before giving you this discount.

You may be able to reduce your interest rate another percentage point or so by making payments on time for a year or more. Some lenders require you have at least $10,000 in student loan debt to qualify for this discount. Robert Shireman of the Project on Student Debt says keeping up with payments may not sound hard, but very few people actually reap the benefits of this discount.

4: Increase your payment amounts
While you may be lowering your monthly payments by almost 50%, you'll be increasing the amount of money you pay long-term. When you consolidate, your repayment period can be stretched to a 30-year term depending on how much debt you have. As a result, you're paying a lot more interest.The solution: make higher payments. There are no prepayment penalties. The savings can be dramatic. A student with a $20,000 worth of debt would pay $5,809 in interest over a decade. With a 20 year consolidated loan, the interest payment of that same loan would more than double to $12,681.

Type Current APR
30 Yr Fixed Mtg 5.69% 5.88%
5/1 ARM 5.54% 6.88%
$30K HELOC 6.23% 0.00%
36 Month New Car Loan 6.88% 0.00%
1 Yr CD 4.79% 4.91%

5: Consolidate while you're still in school
If you're still in school, you can take advantage of a loophole to consolidate now. If you're a freshman or a sophomore with more than $5,000 in debt, you'll be able to consolidate.First, call the lender who holds your loans and ask for an early repayment status. Then you'll need to get an in-school deferment so you don't have to start paying back your bills right away.Now you're eligible to consolidate. Once you graduate you'll have to start paying back your loans immediately, but you can always claim an economic hardship or an unemployment deferment according to Mark Kantrowitz of finaid.com.This loophole will close on July 1st.

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