Question:
I keep getting paperwork for student loan consolidation (such as HALO) is this a "gimmick" or is it something i should consider doing. right now i pay out roughly $450 a month (for 10 years) for my student loan. I was under the impression that loan consolidation, even when the current rate is low, doesn't really lower the rates on the original loans. But your response below ('' the interest rate becomes fixed at the current rate plus a small amount.'') seems to indicate otherwise. Which is really the case?? Please tell me if I am understanding things correctly: 1. The interest rates on pre-existing loans don't really change very much, if at all. 2. It's only any ''new'' loan taken out at time of consolidation that has the ''current'' low rates applied to it. Right??? .

Answer:
Stafford loans have a variable rate that is adjusted each sumer based on a relationship to t-bills, with a cap of 8.25%. Current rates are 4.06%, the lowest they have ever been. In the future that rate will change, up or (not too likely) down, each summer. Borrowers may choose to "consolidate", meaning that all Stafford loans are brought together as one loan and the interest rate becomes fixed at the current rate plus a small amount. Current consolidation rate is 4.13%.

On the likely umption that rates will go back up over the life of your loans, locking in a permanent low rate is beneficial. But, most lenders automatically consolidate Stafford's into a long-term loan unless you request otherwise and the extra years of interest will offset your savings - request a shorter term, or if they can't do that then simply pay an additional amount each month to still wipe it out at the end of the current ten year term - there should be no penalty for prepayment. You don't need to change lenders - your current lender probably offers a consolidation program. But check out the competitors - some offer promotional bonuses.

When you do a consolidation loan, the lender takes a weighted average of all loans you are including in the consolidation and rounds it to the nearest 1/8 percent. So a consolidation loan could raise or lower the interest rate. Most lenders have a calculator on their site which allow you to see if it would be to your advantage to consolidate. Of course, the biggest advantage is that your interest rate is fixed for the life of the loan. With interest rates now at the lowest point they've ever been, to many that is a strong reason to do a consolidation loan. For those of you receiving mass mailings, my suggestion is be careful who you work with.

Due to the huge increase in consolidation loans, many companies have entered the lending field over night to capitalize on this business. Also, keep in mind that, if you have all of your loans with one lender, then you must do a consolidation loan with that lender. This is a Federal reg called the One Lender Rule. There has been talk about removing this reg during Reauthorization, but that'll be a couple of years down the road.

Please tell me if I am understanding things correctly: 1. The interest rates on pre-existing loans don't really change very much, if at all.

No. You're missing the point. Say you started paying off $10,000 in Stafford loans when you graduated three years ago and the rate then was 7%. You made payments including interest of $700 per thousand for that year. If the rate drops to 6% in the second year, you will pay interest of $600 per thousand still owed. If the next year it is 8% you will pay $800 per thousand. Each year you should have received a notice from the lender that the rate and your monthly payment changed, up or down. Current rates are actually 4.06% so you are now paying only $406 per thousand. But it could go back up as high as 8.25%.

If you consolidate you combine the existing Stafford loans into one new one and freeze the rate permanently at today's consolidation rate. It will *never* change again. If you do not consolidate, the rate will continue to change each year.

2. It's only any ''new'' loan taken out at time of consolidation that has the ''current'' low rates applied to it.

No. You are paying the current rate on your old loans right now. The difference with consolidation is that it stops changing each year. If I'm still not making this clear for you, you might want to visit a local bank and talk to a loan officer face to face.used too. What is this "weighted average" thing then? I have one loan at 9%. Are you saying that I could actually get that refinanced at 4.1%? That would make a huge difference to me. I had always thought that I would be consolidated at 8.25 if I ever did that, so it really wasn't worth it. Okay sorry I confused everyone with the "weighted average." Here's how it works : 1) Write down the current outstanding loan amount and interest rate for every loan you have. 2) Multiply each loan amount by its current interest rate to get each loans "Per Loan Weight Factor (PLWF)" 3) Add all the loan amounts together 4) Add all the PLWFs together 5) Divide the total PLWF figure by the total loan amount and multiply by 100 (Total PLWF / Total Loan Amt * 100 = Weighted Average) 6) Take the weighted average and round it up to the nearest 1/8 percent (.125, .25, .375, .5, .625, .75, .875, .0) 7) Compare the weighted average to 8.25 and take the lower of the two. You now have what would be the interest rate on your consolidation loan. For example, let's say you have two Stafford loans, one $2000 loan at 6.75%, one $3000 loan at 8.25%. Step 2) 2000 * 6.75% = 135 3000 * 8.25% = 247.5 Step 3) 5000 Step 4) 382.5 Step 5) 382.5 / 5000 * 100 = 7.65 Step 6) 7.65 rounded up becomes 7.75 Step 7) 7.75 < 8.25 So if you did a consolidation loan in this example, you would now have one loan for a total of $5000 at a fixed interest rate of 7.75%. You then need to decide if it's to your advantage to do the consolidation loan or not. Sorry this is so long but hope it clears up the "weighted average" term.