GRADUATES SHOULD CONSOLIDATE LOANS NOW.

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Graduated or soon-to-graduate college students with sizable education loans may want to consider consolidating them by July 1, suggests the Financial Planning Association, Denver. The incentive to consolidate by that date stems from several factors.

For starters, interest rates are at record lows. However, short-term rates have begun to rise again, so consolidation rates are expected to go up when new annual rates are announced July 1. Another factor is the potential for the consolidation program itself to change. Private lenders who issue these loans have been lobbying to alter the rates from fixed to variable--rates that could go as high as 8.25%.

The Bush Administration's proposed 2006 Federal budget includes just such a recommendation. In a rising interest-rate environment, variable rates could add thousands of dollars in finance charges for some borrowers. The Bush proposal also would add a one percent consolidation fee the borrower would have to pay and would double the fee the government charges lenders for originating the loans. Lenders likely would try to recoup those costs, possibly lowering or eliminating some of the loan-reduction incentives they currently extend to borrowers.

Beyond potentially lowering the overall interest rate and saving hundreds or even thousands of dollars in interest charges, borrowers benefit from consolidation in three other ways. First, they replace multiple payments, and paperwork, with a single monthly payment.

Second, consolidation allows borrowers to stretch out their loan payments for longer than the standard 10 years--as long as 30 years in some cases. This means smaller monthly payments, a big help for recent graduates working in relatively low-paying starter jobs.

Third, consolidation loans allow the flexibility of penalty-free prepayment, which an individual might be able to afford once he or she moves into a higher-paying job.

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