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Managing Money : You May Save if You Refinance Student Loans

If you ran up significant debts while paying for your college education, now may be the time to consider refinancing or consolidating your guaranteed student loans.

Unless you believe that loan rates will probably drop more, there are few disadvantages to such a move, and the advantages can be substantial.

What are the advantages? You may be able to lock in a reasonably low rate, reduce the number of checks you write each month and, if needed, extend repayment terms to lower your monthly outlay.

There are generally no fees associated with a loan consolidation. Refinancing a student loan--a separate proposition--can cost a maximum of $100 per loan. But some lenders, including Citibank in New York, waive fees on refinances too. (Not all student loan lenders do refinances, but most have consolidation programs.)

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The disadvantage of a refinance or consolidation usually boils down to inconvenience. You must get the loan forms and fill them out. Although your bank is required to let you know about all the federal student loan consolidation and refinancing programs that it has available, banks don’t generally actively market these programs. That’s because they don’t make much money--if any--on such deals.

Also, a few people’s loans are at such low rates that a consolidation or refinance would not benefit them, industry experts say. However, anyone with student loans at rates above 9% should consider it.

The one qualification: You must owe at least $5,000 to qualify for federal loan consolidation programs. And some lenders, such as San Francisco-based BankAmerica, won’t consolidate less than $10,000 in loans.

What makes consolidations and refinances such a good deal now is current interest rates.

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Some student loan rates are at their lowest levels in five years. That helps those who have old, fixed-rate loans in the 12% to 14% range. They can refinance for variable rates, now set at 9.34%.

It is, of course, possible that interest charges on a variable rate loan will rise. So-called SLS and PLUS loans are repriced once annually at the 91-day Treasury bill rate plus 3.25 percentage points. However, rates on these loans are capped at 12%. In other words, if your old loan cost 12% or more, you can’t lose with a refinance.

Meanwhile, it may also make sense to consolidate your loans now, said Elizabeth Ende, director of product management for Washington based Student Loan Marketing Assn., better known as Sallie Mae.

Theoretically, consolidation will not lower your total interest rate. But it will convert variable-rate SLS and PLUS loans into one fixed-rate loan at a time when rates are most favorable.

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Here’s how it works: If you want to consolidate, you must contact your lender and get the appropriate forms. The forms will ask which loans you would like to consolidate, their interest rate, etc.

Then a processing center will determine what the new rate on your consolidated loan will be. You do not need to consolidate all your student loans, lenders note. But if you don’t, you will probably be asked why. The agency that guarantees these loans wants to make sure you haven’t just forgotten about some of your debts.

Your new loan rate will be a weighted average of the rates you were paying on the to-be-consolidated loans, rounded to the nearest whole number. (In other words, if the weighted average rate is 9.34%, you’d get a 9% rate on your consolidated loan; if the average was 9.56%, the rate would bump up to 10%.) The consolidated rate cannot be less than 9% or more than 12%, however.

Rates on consolidated loans are fixed, so there is no risk that they will rise later. And that helps those who have SLS or PLUS loans, which offer floating rates that have historically been set well above 10%. And it can help those with Stafford loans, which start out at an 8% rate but kick up to 10% after four years.

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If the bulk of your loans are in heavily subsidized plans, such as the Perkins loan program, which offers a 5% fixed rate, consolidation may not make sense. Or you may choose to exclude low-rate loans from a consolidation.

If you consolidate your loans, you often also get the choice of stretching your payments over a longer term. The time you can take to pay will depend on how much you borrowed--the bigger the debt, the more time.

Unless you are facing a cash squeeze, experts don’t advise lengthening the term, however. Their argument is financial. If you lengthen the term, you pay more because you are indebted longer.


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