WSJ: Is It Time to Consolidate Student Loans?

The Wall Street Journal wrote an excellent article today talking about why it is probably a good idea to hold off on consolidating your federal student loans until July 1, 2008.

Why Wait? 

Current Stafford loan repayment rates are 7.22%.  Alot of borrowers are eager to consolidate before their grace period is up to lock in the lower in-school interest rate in order to save .6%.  This translates to a rate of 6.625%.  But if the borrowers wait until July 1 of next year, borrowers would likely be able to lock in a consolidated rate of 6.5% or lower.

What Determines Federal Consolidation Rates?

The Education Department resets the interest rate on its Stafford and PLUS programs annually on July 1 using a formula based on the 91 day Treasury Bill.  Since rates on the 91-day T-bill tend to closely reflect the fed funds rate, the Fed’s recent moves to trim short termrates a total of 3/4 of a point should result in a lower interest rate.  Of course, you also risk rates rising.  But given the housing and credit crisis, that doesn’t look likely.  Though, you never know!

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The Catch 22 of College Lending

We all realize that college is expensive and most of us have to borrow money in order to go to college.  What many of us don’t realize is that many young adults preparing to go to college are unable to borrow enough money to go to college. 

There are many young adults in this country who have parents who make good incomes but are financial disasters.  The parents have bad credit and cannot cosign on a loan.  For the children of these individuals, college becomes almost impossible.  Because their parents make decent wages, the children do not qualify for Perkins Loans, Pell Grants, or even subsidized Stafford Loans.  The student basically is left with $2,265 in available loans for their freshman year.  Try to go to any college full time on that amount of money.  Even community college is nearly impossible.

Unless the young adult is able to find a cosigner for their loans, they are unable to fund their education.  This is a reality that many college bound seniors are facing.  What the answer is, I don’t know…