Question:
My wife and I current have approximately 52k in federal student loan debt consolidated in three separate SallieMae accounts at a composite interest rate of 4.22% as of July 1. We have put off consolidating these loans (and thus fixing the interest rate) for six years under the premise that interest rates could fall. Given that we used to have nearly 115k at 7.8% .if only that crystal ball had worked in other areas of our portfolio. (Pets.com just seemed to be a road to early retirement for a few months there.) On to the question. We have been paying down this debt as quickly as possible over the past several years under the premise that we were improving our bottom line during the bear market.

We also just hate debt and want SallieMae off our back. Now that short term rates have essentially hit rock bottom we are finally interested in consolidating. We have no interest in extending the repayment period, we will continue to pay as much as possible towards these loans over the next four years. We project only 18 mos. left of student loan payments with our pre-payment strategy. I know SallieMae will extend the repayment period anyway as part of the consolidation product they offer. Does anyone see any down side to consolidation at this point? I haven't been able to verify whether or not we will be allowed to pre-pay principle after consolidation the way we have been for several years now. I assume there is no problem in pre-paying after consolidation, but I am not certain on that. Is there a hidden list on penalties out there for doing so?

Answer:
It is hard to imagine rates getting any lower, so locking with your strategy seems to be prudent. Is there any down side to consolidation at this point? 1) With your loans unconsolidated, you can make the extra principle payments to the loan with the highest interest rate. Once you consolidate, your extra payments will be spread to all 3 loans. 2) If you consolidate your loans together with your wife's, you will both be liable for the entire amount. In case of death of one of you, the student loans would ordinarily be forgiven. In case of divorce, this can cause a real nightmare. 3) Even 3 years ago, people were talking about locking in the amazingly low rates. These are the people who are now complaining bitterly about only being able to consolidate once. Certainly last year, everybody said that rates couldn't drop any further, but they've dropped again. The rates won't change again until July 2004, so it doesn't cost you anything to wait and see what happens (and will save you a smidge of interest). See where the 90 day rates are in April 2004 and make your decision then. I believe that Sallie Mae offers a plan (near the July change date) where they will consolidate you at whichever rate is better, old or new. Given your 18 month projected payoff date, exploring that option in 2004 may be your best bet.