Unless Congress acts, and the President signs off on it, interest rates on federally subsidized student loans are set to rise to 6.8% on July 1, 2013. That’s double the current rate of 3.4%.
For graduates repaying their loans, that could mean a significant increase in monthly payments. If your budget is already stretched, and you don’t have room to pay more on student loans, that could be a real problem.
So, what can you do? One option is to consolidate your federal student loans before the rate increase hits. That way, you’ll lock in a lower rate, as well as avoid future interest rate hikes.
How Student Loan Consolidation Works
When you receive your student loans, they’re usually disbursed individually for different years. This means that you might end up with several different student loans by the end of your college career. You might also have different interest rates, depending on what the rate was when you received each of your loans. As a result, you make multiple payments on your loans, which usually have terms of 10 years.
Student loan consolidation provides you with a way to put all of your federal loans into one place. You only make one payment, and you have only one interest rate. Additionally, the term is often lengthened, giving you 25 years total to repay your student loan debt.
If you want to take advantage of student loan consolidation from the federal government, you need to make sure that the loans in question qualify. You can fill out information online that’ll help you determine which loans are eligible for consolidation.
Once the loans are identified and approved, you receive a bigger loan that pays off the smaller loans. Your payment amount is set — so you won’t have to worry about whether or not Congress will come to the rescue every few years and keep student loan interest rates low.
Downsides to Student Loan Consolidation
The biggest disadvantage to student loan consolidation is that the longer term usually means that you repay more overall. If you stick with the shorter 10 year term, and make the higher overall payments, you’ll be out of debt sooner, and probably pay less (assuming interest rates don’t go too high over time).
You can offset this issue by making extra payments when you have a little more money. If you can pay off your student loans in 10 years anyway (with the help of extra payments), and are locked in at the lower rate, you can save money in the long run. But you have to be disciplined in order to make that strategy work.
The Bottom Line
Interest rates on student loans may rise July 1. Even if the rate increase is avoided this year, there’s a good chance that student loan rates will rise at some point in the near future. No politician is suggesting that the student loan interest rate be set low permanently, so at some point during the course of your repayment, you’re likely to be hit with an increase.
How have you prepared for the potential increase in interest rates?