ASK KIM
Reconsolidating Student Loans Isn't Easy
by Kimberly Lankford

I consolidated my student loans a while back and am paying more than 7%, but really regret my decision to consolidate so early now that the rates have continued to fall. Is there any way that I could reconsolidate my student loans and take advantage of today's low rates?

Consolidating student loans locks in your rate for the life of the loan. As you've discovered, you can generally only consolidate once. But there are exceptions.

You can consolidate again if you still have a federal loan outside your other consolidated debt or if you return to school and take out a new federal loan.

Stafford loans now charge 3.37% interest, or 2.77% if you're in the six-month grace period after leaving school.

The downside, though, is that this move probably won't lower your interest rate as much as you'd expect. When you consolidate, your new rate is based on a weighted average of your loans, rounded up 1/8 of a percentage point. The weighting is based on the volume of the loans, so if your old consolidated loan is for a much larger dollar amount than any new loan you take out, then you'll still end up paying a lot more than today's going rates (and you'll raise the rate on your new loan).

There are other ways, though, to lower your interest rate. If you have equity in your home, you may be able to take out a home-equity loan to pay off your student loans. The interest rate may be a lot lower than what you're paying now (see BankRate.com's latest home-equity loan rates). You'll also be able to deduct the interest on up to $100,000 in home-equity debt. Keep in mind, though, that your house is at stake if you have trouble paying it off.

If a home-equity loan isn't an option for you, see if your lender has any way to lower your rate. Sallie Mae, for example, will cut your rate by 0.25% if you pay through automatic deduction from your checking account, and they'll lower your rate by a full percentage point if you've paid on time for 36 months. Collegiate Funding Services, another lender, offers similar discount programs.

If you're truly strapped for cash, you could extend your repayment period. That lets you cut your monthly tab by as much as half, although you'll end up paying more in interest over the life of the loan.