Jordan Goodman is the author of Everyone's Money Book, available at 888-201-6300. This is the third edition of the book. You can also visit his Web site at www.moneyanswers.com. He talks with us on Thursday mornings.

June 26, 2003

"Refinancing Student Loans"

There are currently 16 million people owing $250 billion in student loans, according to the Department of Education. The average graduate from college this year will have $18,900 in student loans, a 66% increase from 5 years ago, according to Nellie Mae.

Federally guaranteed student loan rates are set each year based on the rate on 3-month Treasury bills in late May for the year starting July 1. Starting then, the rate on Stafford loans falls to 3.42%, down from 4.06% over the past year. Plus, loans taken out by parents fall from 4.86% to 4.22%. For borrowers in a grace period or deferment, the rate will now be 2.82%, down from 3.46%. These are the lowest rates ever on student loans, and they provide the best chance ever to lock in a great rate on a refinance. If you took out a loan since 1998, your rate should automatically fall to these levels, but if it was taken out before 1998, you will have to initiate it. If you consolidate several loans into one, rates can be locked in at 3.5% for newer loans in repayment and 2.875% if they are in their grace period.

To refinance, your bank takes an average of the rates on all your federal education loans, rounded up to the nearest 1/8 of a percentage point. You may want to exclude any particularly high-rate loans you have because they will bump up your average rate. You might pay off the high-rate loan separately. Go to a major student loan lender like Sallie Mae at www.salliemae.com or 800-524-9100, or Collegiate Funding Services at 888-423-7562 or www.cfsloans.com to get the best deal when you consolidate and refinance.

Some lenders will even cut the rate further under certain circumstances. At Sallie Mae, they will cut the rate by one percentage point if you make 48 consecutive on-time payments. Other lenders will cut rates by a quarter point if you allow automatic debiting on your bank account to repay the loan. Ask your lender if there are any other programs you can take advantage of to lower your rate even more.

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