Time's a wastin': Parents, consolidate PLUS loans now, before rates ...

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Author: Sandra Block

Section: Money, Pg. 03b

If you're a parent, you're used to giving advice. Well, now it's your turn to listen: If you have a Parent Loan for Undergraduate Students, known (redundantly) as a PLUS loan, you should think about consolidating it. And no lollygagging. Time is running out.

PLUS loans are federally backed loans that help parents pay for college costs that aren't covered by financial aid. The loans are put in the parents' names and are their responsibility. Most lenders let parents defer repaying the loan until their child has finished school.

As with Stafford loans, which are federally backed loans for student borrowers, the interest rate on PLUS loans will be adjusted July 1, based on rates for short-term Treasury bills. The rate for Stafford loans is expected to rise to around 7.1% from 5.3%; the rate for PLUS loans is expected to increase to about 8% from 6.1%.

If you have outstanding PLUS loans, you can lock in a rate of 6.125% by consolidating before July 1. Depending on how much you've borrowed and how long it takes you to pay off the debt, consolidating could save you thousands of dollars in interest over the life of the loan. For example, if you have a $30,000 PLUS loan and repay it in 10 years, consolidating could save you nearly $3,500 in interest.

Consolidating "is as important to the PLUS borrower as it is to the Stafford borrower," says Tim Bornemeier, managing director of Nelnet, a student lender. "It's the identical situation."

You don't need to have more than one PLUS loan to consolidate. You can consolidate a single PLUS loan, though most lenders require a minimum balance before they'll consolidate. At Nelnet, for example, the minimum balance is $7,500.

The rules for consolidating PLUS loans are similar to those for consolidating a Stafford loan. Here's what you need to consider before you consolidate:

*It won't necessarily save you money. When you consolidate, you extend the term of your loan by up to 30 years, and you lower your monthly payments. But the longer you take to pay off the loan, the more you'll pay in interest over the life of the loan. Even with the lower rate, "you might wind up paying more in the long run," says Keith New, spokesman for American Education Services, a non-profit that services student loans. The best strategy: Lock in the lower rate, and pay off the loan as quickly as you can.

*Shopping around can lower your costs. If all your PLUS loans are with the same lender and that lender offers loan consolidation, you must consolidate with that lender, Bornemeier says. But borrowers who have PLUS loans with more than one lender can consolidate all their PLUS loans with any lender.

Look for lenders that offer discounts and incentives. Some lenders will reduce your rates by a quarter of a percentage point if you arrange for your payments to be automatically withdrawn from a bank account. And some lenders will give you another rate cut after you've made a specific number of on-time payments.

*You can't consolidate your child's Stafford and your PLUS loan into a single loan. You can consolidate only those loans that are in your name, Bornemeier says.

But if you're repaying your own student loans and PLUS loans taken out for your children, you can consolidate those into one loan, says Mark Kantrowitz, founder of FinAid, a financial aid website. The rate will be based on the weighted average of interest rates on all your loans, rounded up to the nearest one-eighth of 1 percentage point.

New fixed rates

If you plan to borrow more for your child's education in the months ahead, prepare to pay more. Starting July 1, new PLUS loans will carry a fixed rate of 8.5% for the life of the loan. The change, part of the deficit-reduction bill signed into law this year, applies to loans issued after July 1. Stafford loans issued after July 1 will carry a fixed rate of 6.8%.

That's the highest rate for PLUS loans since 2001 (see chart). Some families may fare better by borrowing from another source, Bornemeier says. For example, the average rate for a home equity loan is 7.68%, according to Bankrate.com.

Private education loans are another alternative. Some private lenders are advertising rates as low as 7.5%. Those rates, though, are usually limited to borrowers with excellent credit.

Even if you qualify for the best rates, you should scrutinize the terms of private loans. Some rates are in effect only while your child is in school, Kantrowitz says. Once your child graduates and you start repaying the loans, the rate may rise by 1 to 2 percentage points, he says.

In addition, most private education loans have variable interest rates, which means rates could rise even more in the future. --- To suggest future columns: e-mail sblock@usatoday.com.

Recent PLUS rates Recent rates for the Parent Loan for Undergraduate Students (PLUS): 2000-018.99% 2001-026.79% 2002-034.86% 2003-044.22% 2004-054.17% 2005-066.10% Source: FinAid website

(c) USA TODAY, 2006