Right now, student loan consolidation may be on the minds of many student loan borrowers. If you graduated in May, your loans are probably coming out of their grace period right about now. Some of you may already have made your first payment.
I received an email question recently about consolidation—specifically, if borrowers would be better off waiting to consolidate their loans—and I wanted to share my response with all the Student LoanDown readers. The short answer is: It depends.
If you’re just entering repayment on your student loans, it’s likely some of the loans are variable-rate federal loans. The rate of these loans is adjusted annually each July 1 
based on the 91-day T-bill rate. If you’re a borrower with these loans, it’s possible your rate may go down in July.
Remember, the rate on a consolidation loan is based on the weighted average of your current interest rates rounded up to the nearest one-eighth of a percent. Lower interest rates on variable loans could mean a lower consolidation loan interest rate.
So, should you wait?
There are a number of reasons you may decide to consolidate your loans, and many variables play into whether consolidation is the right choice. It depends on what you’re hoping to accomplish by consolidating:
- If you’re looking to reduce your monthly payment by consolidating, chances are your monthly payments might be more than you can handle. If that’s the case, you would likely benefit more from an immediate ease on your monthly cash flow. Otherwise you’d still have to make those higher payments each month until the July rate change.
- If you want to lock in your rate by consolidating—which is more of a factor for those with a large amount of variable rate loans—it could be beneficial to wait until July. Right now variable interest rate Federal Stafford Loans are at 7.22% during repayment. It is possible that next July variable interest rate loans might be lower, but there is no guarantee. There’s always the chance that the rate might not decrease.
For some borrowers, consolidation may not be the right option at all:
- Depending on your interest rate and loan balance, it might not make sense to consolidate. For example, if you have a large amount of debt at one interest rate and a smaller portion of debt at a higher rate, it might not be the best choice to combine those debts. You could be paying a higher interest rate in the long run on a portion of the balance that originally had a lower rate.
- Another option to consider in lieu of consolidation is an extended repayment plan. This option is generally available if you have more than $30,000 in student debt through the Federal Family Education Loan Program (FFELP) . With extended repayment, your monthly payment would decrease without having to take out a new loan.
So that’s the skinny on waiting to consolidate. Any questions?
With the fed dropping rates and the current economic situation, what might be a reasonable prediction for the july 08 Stafford rates. Consolidate now or wait?
dan! Sorry for the delay in responding. I'm actually planning to post on this later this week. You aren't the only one who has been asking. Keep your eyes peeled!
I have both subsidized and unsubsidized loans and need to consolidate. They are out of grace period now and I got a forbearance. I was told I could still consolidate loans in forbearance. I hope this is true because I'm thinking of waiting until the July 1 date to consolidate because it's really my only chance to at least try to get a lower rate? My question is, if I'm going to take this chance, was I accurately advised that I can consolidate loans in forbearance?
Hey Suzy -- you were advised correctly! You can consolidate those loans.
One tip for you: during forbearance you're responsible for the interest accruing on both your unsubsidized and subsidized loans (if you were in a deferment, the government would pay the interest accruing on your subsidized loans). When you consolidate your loans any unpaid interest is capitalized (added to the principal balance). You might want to think about paying off the accrued interest to avoid a higher consolidation loan balance once you do consolidate.
Is there a link you can recomend to see the trends of the treasury account over time. I am anxiously waiting for july and hoping for a drop. In your opinion, what economical instances would induce a substancial drop in the consolidation loan interest rates? Are there any trends you can recomend looking for? Though i want my loans consolidated i dont want to kick myself five years from now if the take a larger drop over couple tenths of a point.
Hey Paul - Check out my post from yesterday, "Federal loan rate changes?" Hopefully that will give you some good insight, but let me know if you have more questions.
I graduated in December, so my grace period is almost over. I have Sub/UnSub and Perkins Loans that are in need to consolidate. I also just learned right before stumbling to this site that rates may go down in July. So, from what I gathered here: I can defer my first payments for the month of June, and then consolidate in July? Do you consider this a good move? Having possibly a lower interest rate would be great, however I'm afraid to mess with the idea of not consolidating when I should be. Any further advice would be great. Thanks!
Justin -- for more information on the possible rate changes check out my post from May 7, "Federal loan rate changes?" If you're looking to lock in an interest rate through consolidation, waiting for possible lower rates in July could be beneficial. As far as June is considered, you might want to double check with your lender that your loans will have a payment due that month. With a 6-month grace period, you shouldn't have a payment due until July. If a payment is due in June, your lender can explain the available deferment and forbearance options.