FINANCIAL AID
Rock Bottom
(Page 2 of 2)
by Kristin W. Davis

There's more: If you consolidate with a private lender and take advantage of payment incentives, you can cut your interest rate even further. Private lenders, such as Sallie Mae, Access Group and Citibank, knock one-fourth percentage point off your rate if you sign up to have payments automatically debited from a bank account; they'll reduce the rate by another point after 36 on-time payments. So after the third year, you could be paying a paltry 1.63%. And, yes, that's tax-deductible interest, cutting the real cost of borrowing even more. You can deduct up to $2,500 of student-loan interest each year, and this write-off is available whether or not you itemize deductions. The right to claim this deduction is phased out if your income exceeds $50,000 on a single return or $100,000 on a joint return.

Can you consolidate while you or your child is still in school? Houston dad Jerry Taylor did just that, locking in a 4.25% rate on $18,000 worth of PLUS loans. He'll undoubtedly borrow more before his son, a sophomore at Dillard University in New Orleans, graduates. But he'll save money on at least a portion of his debt.

Stafford-loan borrowers can consolidate before graduation only in the federal government's direct-loan program, which means they must have at least one direct loan or be studying at a school in the direct-loan program. Borrowers who have loans only from private lenders in the Federal Family Education Loan program are out of luck. Locked out entirely are borrowers who have already consolidated. They can't consolidate again unless they have new education loans to fold in.

Make the most of this deal. Student-loan consolidation was originally meant to help students who needed payment relief. In order to generate lower payments, these loans have longer repayment terms than standard Stafford or PLUS loans. (A $20,000 loan comes with a 20-year repayment term, for instance.) That means you'll rack up more interest over the life of the loan. But there are ways to maximize your savings from the lower rates.

One way is to make larger payments than are required. There's no penalty for prepaying a student loan. Go to a payment calculator (such as the one at www.finaid.org/calculators) and figure out what your payment would be over ten years (or whatever amount of time is left on a loan already in repayment). Make that payment each month to avoid stretching out the debt.

Or, plan to make good use of the low-cost money. There aren't many places where you can borrow at a fixed rate of about 2% with tax-deductible interest. So if you take advantage of the super-low payment over 20 or 30 years, be diligent about using your extra cash flow to pay off higher-rate debt or to make contributions to a retirement or college-savings account.

--Research: Elizabeth Kountze

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