June 10, 2008 - 11:30am
Attention recent college graduates: starting July 1st, you will have a once-in-a-lifetime opportunity to significantly reduce your federal student loan costs. We at Higher Ed Watch are telling you this, because if some in the student loan industry get their way, you may never hear about it.
For six months beginning July 1st, members of the Class of 2008 who have taken out variable interest rate federal student loans will have the opportunity to refinance those loans and lock in a low, fixed 3.61 percent interest rate. That's about 3 percentage points lower than the variable rate that was set last year. This is the biggest one year drop in student loan interest rates ever, and the 4th lowest interest rate in the 15 year history of the student loan consolidation program.
All borrowers with non-consolidation federal student loans that were issued before July 2006 [when the interest rate on new student loans changed to a fixed rate of 6.8 percent] can save big money by refinancing their debt after July 1st of this year. But it is the most recent graduates who can get the lowest rate by consolidating variable interest rate federal student loans during their post-graduation, six month grace period that takes place before student loan repayment begins.
A typical member of the Class of 2008, for example, with $17,000 in federal student loan debt can be expected to save approximately $2,100 in lifetime student loan repayment costs if they consolidate in the second half of this calendar year, assuming their loans' current variable interest rate of 7.2 percent is their approximate average interest rate over the next 20 years. Variable interest rates go up and down from year to year, whereas a new consolidation loan interest rate is fixed at 3.61 percent.
There's a catch. Because of subsidy cuts that Congress made last year and liquidity problems due to the credit crunch, most private lenders have stopped making consolidation student loans, which are necessary for the refinancing boon to borrowers. As a result, private lenders have little incentive to make students aware of the opportunity offered elsewhere (they don't want to lose your business), and given past behavior, are likely to try to actively dissuade students from refinancing.
In fact, this is particularly true this year since most borrowers who wish to consolidate their federal student loans are most likely to do so through the U.S. Department of Eduction's competing Direct Student Loan program. Can we really expect the student loan giant Sallie Mae to actively encourage its borrowers to seek Direct Consolidation Loans -- when such a move will require Sallie Mae to lose out on years of interest payments?
If you have any doubt, just listen to what Martha Holler, a Sallie Mae spokeswoman told TheStreet.com during a recent interview on the subject. "There is no immediate need to consolidate as the new rates will be in effect for the next year and many other options, such as extended and graduated plans, exist to help borrowers manage student loan repayment, " she stated. No matter that these other repayment programs don't reduce the cost of the loans for borrowers, and in fact, under the extended repayment program, actually increase a borrowers' lifetime costs by stretching out the loan repayment period over many, many years.
All of this is to say that the onus for alerting recent graduates of this great opportunity lies squarely with the U.S. Department of Education and other public officials. Unfortunately, the Department has a weak record of marketing and promoting the Direct Loan program. In addition, loan industry officials are likely to put the Department under tremendous pressure to play down this cost-saving option for borrowers. There's little doubt that lenders will play the "credit crunch card" with policymakers -- warning them that the potential loss of borrowers to direct lending, on top of the turmoil created by the credit crisis, could cripple them.
The Department must resist this pressure. It must also be prepared to penalize lenders that prevent borrowers from refinancing their loans. One way that lenders have done this has been by refusing to complete the loan verification certificates (LVC) that allow a loan to be shifted from one lender to another. While the Department has issued guidance to lenders to clarify the rules regarding LVCs, the agency's own Inspector General has faulted it for failing to take action against lenders who continually refuse to comply with the rules. "When a loan holder fails to return an LVC timely, or fails to provide all of the information requested on the LVC, the Department does not take effective action to ensure that the applicant's loan is consolidated," according to a 2005 Inspector General report.
The Department and other public officials need to move quickly to ensure that recent graduates are aware of this once-in-a-lifetime opportunity and to alert lenders that it won't allow them to block borrowers from refinancing their loans. Department officials must remember that the point of the federal student aid is not to protect lenders' profits, but to make college more accessible and affordable for the millions of students who benefit from these programs.
Note: Stephen Burd and Michael Dannenberg with Higher Ed Watch contributed to this post.
