Paying for College

Question: All my student loans are federal loans through Sallie Mae and have a fixed 6.8% interest rate. I can afford the monthly payment, but the interest is just so high! Will consolidating give me a better interest rate?

It depends on when you took out the loans. Any federal loans taken out before July 2006 have variable interest rates. Consolidating these loans after July 1 of this year will reduce the interest rate to 2.6% from its current 4.2%, predicts Mark Kantrowitz, publisher of FinAid, a Web site that tracks the college financial aid industry.

The loans that you took out after July 2006 are a different matter. These loans have a fixed interest rate of 6.8%, and there’s not much you can do about it. While there has been some discussion in Congress about allowing past borrowers to re-consolidate at these rates, the talk hasn’t gotten serious because the interest payments help support the Pell Grant program, Kantrowitz says.

Your best strategy might be to prepay the loan by increasing your monthly loan payments, if you can afford it. That will whittle the principal down faster and reduce the amount of interest that you pay over the life of the loan.

Even though some private student loan companies may advertise loans with variable rates below 6.8%, you should generally steer clear. As many mortgage borrowers found out the hard way, low teaser rates often reset after a few years and climb much higher.