Grads face complex decision: whether to consolidate loans

College graduates with heavy student loan debt face a complicated landscape this year as they approach the annual decision whether to consolidate their loans into a single payment plan.

Managing student loan debt has become increasingly important for many college graduates, as the median debt for student borrowers rose more than 60 percent from 1996 to 2004. In recent years, rates have risen significantly when they’ve been reset on July 1,  making the decision to consolidate relatively easy; not doing so before the deadline meant owing a lot more money in the long run.

But this time around, the rates for variable interest federal loans, which include Stafford Loans and PLUS Loans, are scheduled to increase by only 0.08 percentage points on July 1. Based on a federally mandated formula, rates for borrowers still in school, those who have been graduates for less than 6 months, or those in deferment will be set to 6.62 percent. Those who have begun repaying their debt will get a rate of 7.22 percent; and PLUS loans, for parents trying to finance their kids’ education, will carry an interest rate of 8.02 percent.

Changes in the rates have been closely monitored by students, parents, and lenders as college graduates are borrowing more money to pay for their education. According to a 2006 College Board Report, the median debt level for a graduate with a bachelor’s degree from a four-year college was $19,300 in 2003 dollars. That report also states that 52 percent of undergraduate students’ financial aid came in loans in the 2005-2006 school year, as opposed to 46 percent in the 2000-2001 school year. The proportion of financial aid in grants decreased to 42 percent in 2005-2006 from 47 percent in 2000-2001.

Consolidating student loans allows borrowers with two or more federal student loans to combine them into a single loan. The interest rate for this loan is determined by size and the interest rate pegged to the loans that are being combined and then rounded to the nearest eighth of a percent.

Ashley Phillips, a recent graduate of Emerson College, said she has about $45,000 worth of student loans to pay off. She said Emerson required graduating students to attend an exit interview as well as go through another exit interview online to provide information about managing her debt, and she took time to research her options. But she was still debating whether she should consolidate her loans.

"I’m just unsure if I want to extend my payment period." she said.

Karen Busanovich, a certified college planning specialist who advises families on how to finance college educations, said consolidation is the right move for spring 2007 grads because they can lock in near the lowest interest rate offered by applying for consolidation within six months of graduation.

"Kids who are seniors now and graduating, they have a six-month grace period," she said. "It probably makes sense for them to consolidate their loans now and try to lock in."

But consolidation could result in worse rates for other borrowers. For example, many lenders offer a quarter percentage point discount for borrowers who enter a direct deposit payment plan as well as a full percentage point discount for borrowers who make the first 36 months’ worth of payments on time — benefits that could be lost by consolidating. Also, lenders typically stretch consolidation loan payment schedule to the maximum length, which could be as long as 30 years, meaning that the borrower could end up paying more money in interest over time than the standard 10-year loan.

Patricia Scherschel, vice president of Sallie Mae, a provider of student loans, said consolidation can be a good debt-management strategy as well as a credit-building strategy for recent graduates because the lower monthly payment in a single bill makes it easier for graduates to build a good credit history, as well as giving borrowers more wiggle room to eliminate their more expensive debt like credit cards. She also said taking a longer payment period and paying more than the monthly minimum whenever possible would reduce the cost of interests, as well as hedging against tougher stretches.

"The borrower is in the driver’s seat in terms of managing their monthly payments," Scherschel said. "Do a little bit of legwork and make sure you have really good information so you can start figuring out your repayment options."

Se Young Lee can be reached at vlee@globe.com.