Students will save by consolidating

The gift of cash in the pocket certainly is worth the time and effort to make a phone call.

Immediately is not too soon for students to protect against the vicious anti-competitive, anti-student legislation passed by Congress during the week of Christmas. The bill, which is highly unfavorable to students, is likely to be signed into law by the president early this month. This legislation, as it currently reads, will prevent students from locking in the present in-school/in-deferment rate of 4.7 percent by consolidating their loans and will further curtail most students who have ever consolidated from shopping around for a lower rate, no matter how long their loan term is or if another lender offers them a better deal.

There is, however, just enough time to “make hay while the sun shines.” Students with Direct Loans may lock in the current rate of 4.7 percent by simply contacting the U.S. Department of Education and then requesting and completing an in-school consolidation application. But those whose loans are held by student lending companies such as Sallie Mae or Citibank must initially request “repayment status” with their lender, then once that is granted, ask for “in-school deferment status” before consolidating with that lender to get the 4.7 percent fixed rate. According to the Department of Education, “repayment status” is a requirement for in-school consolidation for Family Federal Education Loan borrowers (those whose loans are held by lenders other than the U.S. Department of Education’s Direct Loan program) and “in-school deferment status” guarantees the lowest consolidation rate.

January 2006 is the time to make this financially prudent move while Congress is in recess. Once the legislators return to Washington this month, this short window of opportunity could be permanently eliminated and students who failed to take this action will be stuck with repaying possibly thousands of dollars that they otherwise would not be accountable for. The gift of cash in the pocket is certainly worth the time and effort and it’s indeed worth putting one’s finger on the dial pad to make a phone call.

The deadline to avoid being penalized by the new law is June 30, but prior to last week, the effective date was to be the day the bill is signed into law by President George W. Bush. Moreover, the House proposal went so far as to prohibit consolidation until after the grace period ends. Since the House and Senate bills slightly differ and may not be in final form, those in the loop in Washington cannot say for sure what the cutoff date and final terms will be. For this reason, it’s much safer for students to begin and finish the process this month. Loans that are not yet fully disbursed can easily be added on within six months.

Students with Direct Loans who consolidate while still in school will retain their grace period (the six-month period after a student leaves school in which the federal government pays the interest on subsidized loans), but borrowers whose loans are held by private lenders in the Family Federal Education Loan program would forfeit this benefit. The gain, however, of locking in the current interest rate of 4.7 percent far exceeds the cost of the lost interest subsidy for almost all students.

Congress also has raised the interest rates on new student loans to 6.8 percent fixed and on new parent loans to 8.5 percent fixed, effective July 1, meaning students and parents with unused borrowing capacity this school year would be smart to take the money now as opposed to waiting until after July 1. And, as previously noted, the new law will also prohibit most borrowers who already have consolidated from reconsolidating, making student loans the only loan product in the country that cannot be freely refinanced when a borrower locates a better deal. Ask your congressman to explain that one. Interestingly, not one Democrat voted in favor of the passage of these new student loan laws, but just about every Republican voted for them.

While it is true that virtually every student association and consumer group in the country has opposed these changes to the nation’s student aid programs, and while their collective voices have contributed to the defeat of other even more disastrous proposals, most experts believe that only a much larger last-second appeal by students and financial aid professionals to their Republicanrepresentatives and senators could derail these anti-competitive and anti-student laws in the face of the proposed $70 billion tax cut for America’s richest taxpayers.

C. Victoria Patrick is a retired educator and former student-loan administrator. Please send comments to [email protected]