Trimming Your Student Loan Payments
Down to Size

Lewis Schiff

Question of the week:
With the lower interest rates, it seems everyone's been refinancing their mortgages. Is there anyway to re-negotiate my student loans? And if so, should I? --Alison S.

Dear Alison,

Your timing is excellent, given that the interest rates on Stafford federal student loans dispersed since 1998 dropped to an all-time low this summer--3.42 percent. (Compared to what rates have been in recent years, this is an incredible bargain--as recently as 2001, the rate was 8.19 percent on these loans.) That means that rates for consolidation loans will be lower, too.

We asked the Armchair Millionaire community to tell us about their experiences with student loan consolidating, and heard many stories. Here are two:

Happy to have consolidated. "I have about $16,000 in student loans and am perfectly happy with that. I have since consolidated my loans and locked in a low interest rate. Student loans are good debt, and worth the investment." --Travis

Consolidated too soon. "I consolidated once soon after graduation because I liked the idea of a fixed rate. I wish I hadn't done that, now that the rates have gone down so much, and I can't find a way to refinance that lowers the rates. I don't regret taking student loans to pay for college, but I do regret the way I managed them in the early years." --Robin

People consolidate their student loans for the same reason they usually refinance their mortgages: to reduce their monthly payments. When you consolidate, your original loans are paid off in full in return for a single loan for the combined balances. The new loan will typically have a lower interest rate that is fixed for the life of the loan. If this sounds appealing to you, my guide will provide you with the basic information you need to get started.

The Armchair Millionaire Guide to Student Loan Consolidation

• Is consolidating right for me? If the consolidation loan offers you a lower rate than you're paying now, it probably is, particularly if you're having trouble making your monthly payments. If you're close to paying off your student loans, however, it may not be worth the trouble.
• What interest rate will I pay? It depends on the rates you're currently paying on your loans. The interest rate for consolidation loans is calculated by taking the weighted interest rate of all the loans being consolidated and rounding up to the nearest one-eighth of one percent, with a cap of 8.25 percent. There's an online calculator that will do the math for you on the U.S. Department of Education's loan consolidation Web site at www.loanconsolidation.ed.gov.
• How much will I save? According to Sallie Mae, the leading provider of student loans in the U.S., consolidating student loans could reduce your monthly payments by up to 54 percent. However, these kinds of savings are achieved in part by extending your repayment term. (Depending on the amount you're consolidating, this could be all the way up to 30 years.) If you choose to extend your repayment term, it will take longer to pay off your overall debt and you're total interest expense will be higher.
• Any other advantages? Many lenders will reduce your interest rate by one percent after you've had an on-time payment record for a certain period, such as 36 or 48 months. You can also receive a quarter-point reduction in your interest rate by agreeing to pay by automatic debit. Also, there are no pre-payment penalties on consolidation loans.
• Where do I get a consolidation loan? From any bank or credit union participating in the Federal Family Education Loan Program, or directly from the U.S. Department of Education. The loan terms and conditions are generally the same, regardless of where you consolidate.

THE BOTTOM LINE: Once you consolidate your student loans, they're gone and there's no going back. Since you can only consolidate once, be sure that it's the best financial move that you can make before plunging ahead.

From "Ask the Armchair Millionaire" featured each week on CNNMoney

For more Lewis Schiff articles and resources, click here.

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