No point rolling many student loans into one if new rate is higher

Consolidating your student loans isn't the no-brainer it used to be.

Last year at this time, money mavens were exhorting college students and recent graduates to run right out and refinance their loans before the big July 1 rate hike, which took rates on those loans from the neighborhood of 4.7 percent to 6.54 percent. This year, rates are again going up, but only by a little -- to 6.62 percent.

Other factors about the way college loans are managed have also changed in ways that might make consolidation less attractive for some borrowers. So instead of racing to the bank, new grads should take some time to figure out whether consolidation works for them.

Here are some considerations:

In a college loan consolidation, your original loans are paid off and bundled together in a new loan, much as a mortgage and a home equity line might be bundled together into a new mortgage with a home refinancing.

The rate on the new loan is fixed. It's a weighted average of the interest rates of the loans being consolidated, rounded up to the nearest 0.125 percent.

Students who graduated this spring are most likely to have a mix of variable and fixed-rate loans. Students who already did loan consolidations in the last two years while they were still in college might already have a portfolio of low-cost fixed-rate loans and may not find it worthwhile to reconsolidate just to get everything wrapped into one loan, says Dan Thibeault, president of Graduate Leverage lenders in Waltham.

New graduates will find some advantages in consolidating if they do it within six months of getting their diplomas. They are in what's called a grace period that gives them a price break and six months to start repaying their loans.

For these new graduates, the variable-rate loans are at 6.54 percent and the fixed-rate loan is at 6.8 percent. On July 1, their variable rate goes up to 6.62 percent. But when they move out of the grace period and start repayment, their loan rates will adjust up to 7.22 percent. By consolidating before then, they can lock in the lower rate.

Typically, repayment starts immediately on consolidated loans, but borrowers can ask the lender to hold the loan package until the end of the six-month grace period.

New grads like to consolidate because it can stretch out their repayment period for as long as 20 years and cut as much as 50 percent off of their monthly payments. That might be especially useful for grads who are entering low-paying professions, but in the long run a longer loan can cost a lot more in interest payments, even if the rates are lower.

To figure out your bottom line, ask your lender to estimate your total interest payments on your loans or do it yourself with an online loan calculator. (You can find a slew of them at finaid.org/calculators, or check salliemae.com/repaymentoptimizer.) Do a similar calculation on the proposed loan consolidation.

"The best thing for the borrower to do is say 'show me the money,' " says Patricia Scherschel of megalender Sallie Mae. Once you've seen total costs, decide whether you'd rather burn that debt faster and cheaper, or longer and slower.

While rates on these federally backed loans are fixed, lenders do have leeway to offer incentives, and most do. Some cut your rate if you agree to have payments automatically debited from your checking account, or if you establish a history of paying on time. That latter break often doesn't kick in for three or four years, though, so remember to discount its value. No lenders are allowed to charge fees on federal student loan consolidations and prepayment penalties are not allowed, so shop around for the best discounts and services. Some places to price consolidation loans are salliemae.com/consolidation; myrichuncle.com; and graduateleverage.com.

Linda Stern is a freelance writer. She can be reached at lindastern@aol.com.