Student Loan Consolidation Hot Topics

Yesterday the 91 day T-Bill closed at 4.625%, up about 10 basis points from the previous week. The real question is - the FOMC Fed Funds Rate is still at 4.5%, so clearly the market is building in an anticipated March increase to 4.75%. Will we see this trend continue? Will the 91-day T-Bill hit 5% before the FOMC May meeting?

Hard to tell, hard to predict, but if inflationary pressures continue unabated, the answer will haevv to be yes. That means that by the time the last auction in May occurs (the auction at which the baseline rate is set for federal student loans effective July 1), the rate could actually be above 5%.

Consolidate now! Call us at 877-328-1565 today.

We put together a press release about this very topic. Here’s a read of it…

Quincy, MA (PRWEB) February 23, 2006 — Federal student loan interest rates are predicted to make historic jumps as of July 1, 2006, according to StudentLoanConsolidator.com. For new student loans, the recently passed Deficit Reduction Act will increase interest rates from as low as 4.7% currently to 6.8%, while the worst case scenario for students and graduates with existing loans shows a potential increase from as low as 4.7% to as high as 7.55%, an increase of 61%. If graduates don’t consolidate their federal student loans immediately, they could find themselves paying thousands of extra dollars in interest.

Federal student loan interest rates are set based on the interest rate of the 3 month Treasury bill, or T-Bill. The rate of the 3 month T-Bill at the last auction in May of each calendar year is used as the baseline for setting the rates which take effect on July 1st of each calendar year. In addition, the Deficit Reduction Act legislation will prohibit students who are in school from consolidating their student loans (and thereby preserving today’s lower interest rates) after July 1, 2006.

Christopher Penn, chief economist at the Student Loan Network, remarked, “What we are seeing right now is an assumption in the market that there will be increases in the baseline interest rate in the coming months to 5% or higher. What this means for students is that the projected rates for student loans are likely to go up, possibly as high as 7.55% before the rates are finalized at the end of May.”

If Mr. Penn’s projections are correct, students and graduates could be paying an interest rate anywhere from 6.9% to 7.55%. To prevent these potential rate increases, students and graduates should consolidate their federal student loans as soon as possible. Student loan consolidation offers the ability to lock in fixed rates, make one payment a month, and cut monthly payments by as much as 60%. Parents with federal PLUS loans are also generally eligible for student loan consolidation as well.

For more information or to consolidate federal student loans, visit http://www.StudentLoanConsolidator.com or call toll-free (877) 328-1565.

Email CustomerService-at-StudentLoanConsolidator.com for more information; to apply for a student loan consolidation, graduates should visit StudentLoanConsolidator.com as soon as possible or call toll-free (877) 328-1565.

StudentLoanConsolidator.com is a service of the Student Loan Network (http://www.StudentLoanNetwork.com), an education services company offering students options for managing the entire education life cycle, from getting into their college of choice to financing their education and beyond. The Student Loan Network is based in Quincy, Massachusetts.

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The 91-day T-Bill yesterday went up an additional 10 basis points to 4.563%. Given that the funds rate is 4.5% (see previous blog posts about their relationship) it seems like the T-bill has switched positions with the Funds rate as a leading indicator of economic strength.

The T-bill almost seems like it’s building into the price of the next projected increase to 4.75%. If this trend continues, I would not be surprised to see the T-bill hit 5.0% before the FOMC meeting on May 10 - and if the economy remains strong with a high GDP and core inflation/CPI above average, the FOMC might even push for 5.25% on June 28. If that happens, T-bill rates at the last auction in May could conceivably be higher than 5.25% if the market starts building the projected rate into the price, rather than equalizing with the current price.

What does this mean for student loans? Well, for variable rate Stafford and PLUS loans, here’s the breakouts.

Current:
Stafford in grace: 4.7%
Stafford in repayment: 5.3%
PLUS: 6.1%

Today’s T-Bill rates:
Stafford in grace: 6.263%
Stafford in repayment: 6.863%
PLUS: 7.663%

5.0% T-Bill rate (anticipated):
Stafford in grace: 6.7%
Stafford in repayment: 7.3%
PLUS: 8.1%

5.25% T-Bill rate (possible):
Stafford in grace: 6.95%
Stafford in repayment: 7.55%
PLUS: 8.35%

Deficit Reduction Act rates (take effect after July 1, 2006 for new loans):
Stafford in grace: 6.8%
Stafford in repayment: 6.8%
PLUS: 8.5%

Clearly, no matter which angle you look at, loan rates are not going to be cheaper after July 1. Consolidate now.

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If you look at the standard charts for the 3-month T-Bill, it almost exactly mirrors the Federal Funds Rate that the Federal Reserve Bank puts out; on average, I think it trails it by about 3 weeks. The Federal Open Market Committee (FOMC) just approved a hike in the Funds Rate to 4.5% on January 31, 2006, Alan Greenspan’s last day at chairman.

Since then, the 91-day T-Bill has been tracking upwards to meet that rate. As of yesterday’s auction, the investment rate of the 91-day T-Bill now stands at 4.553%. Chairman Ben Bernanke is widely expected to prosecute an additional increase in the funds rate at the next FOMC meeting, bringing the rate to 4.75%.

After that, the next meeting of the FOMC is in May - May 10, I believe, and how the economy fares between then and now will determine whether the funds rate hits 5% or not. If it does, if economic data shows that inflationary pressures are still too strong for the Fed’s tastes, then 5% it will be, and by the time the last auction in May of the T-Bill is complete, the 91-day T-Bill will most likely be right around the funds rate. So…

Stafford in grace/in school: 6.7%
Stafford in repayment: 7.3%
PLUS: 8.1%

with a T-Bill and funds rate of 5%. Clearly, not a HUGE difference between this and the Deficit Reduction Act’s rates; in fact, students will actually stand to save a little money on Stafford Loans in repayment. Any way you slice it, though… consolidation now will save you buckets of money later.

From the FINAID-L Mailing List:

As things sit now, a student will have an interest rate of 4.75% assuming they consolidate prior to going into repayment. If they only have Stafford’s assuming they round to the nearest 1/8th. On a $18K loan with 10 year repayment, the student would pay $189/month and $4650 in interest (rounding a little) If on the other hand, they go after the rate change, they will be at 6.8% under the new interest rate with a payment of $207/month and they would pay roughly $6860 in interest. To me, the $2200 would be worth losing the 6th month grace and the pain of doing the deferment forms every semester. If they take an extended repayment, the saving is even greater.

Just my two cents.

Leo H.
Associate Director
Office of Financial Aid

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Actually, Leo’s math doesn’t include consolidation, which chops that $189/month down to $140/month and locks in rates. Even without consolidation’s additional payment reduction, it still makes sense to lock in today’s rates. The additional savings are the icing on the cake.Apply now for a consolidation or call us at 877-328-1565

As widely reported elsewhere (including the Financial Aid Podcast), the Deficit Reduction Act (DRA) of 2005 was passed on Wednesday, February 1, 2006 by the House of Representatives by a 216-214 vote. The passage of this bill to President Bush’s desk means that the legislation will almost certainly become law quickly.

Consolidation-related highlights of the final law:

If a borrower received a FFEL consolidation loan, they are prohibited from receiving a subsequent Direct Loan consolidation except in very limited circumstances.

The DRA repeals the early repayment status loophole that enabled continuing students to consolidate while they are still in school.

The DRA repeals the ability of married students to consolidate their loans together.

The DRA requires guarantors to pay a 1% guarantee fee to the Federal Student Loan Reserve Fund. This effectively will eliminate most guarantee fee waivers, thereby increasing student costs. The 1% fee applies to the loan balance.

The final legislation does NOT repeal the single lender rule.

The net effect is that for students, consolidating student loans after July 1, 2006 will become more expensive, more difficult, and restrict choice even further. Combined with new student loan interest rates, there is great incentive for students to consolidate loans now, while rates are relatively low and before the legislation has taken effect.

To consolidate, apply online or call the Student Loan Network at 877-328-1565.