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On money

Low student loan consolidation rates available to new graduates

By HELEN HUNTLEY
Published May 18, 2003

Students graduating from college this spring or summer with student loans have what could turn out to be a once-in-a-lifetime opportunity to lock in really low interest rates.

The rates on federally insured Stafford Loans are expected to drop to a record low 3.42 percent on July 1, from the current rate of 4.06 percent. The incentives available to new graduates - those out of college six months or less - will allow many of them to lock in rates as low as 2.88 percent. Earlier graduates who have not yet consolidated their student loans may be eligible for rates as low as 3.5 percent.

Those rates are only estimates. The actual rates are determined by a formula based on the final May auction of 91-day Treasury bills. However, you may not have to wait for the rates to come out to apply. Many lenders, including Sallie Mae, promise they will accept applications and delay closing the loan so borrowers get the new rate.

Consolidation also offers the option of stretching repayment over as many as 30 years. That's great for those currently struggling to make payments, but it probably means paying more interest in the long run. It also could mean borrowing to finance your children's college education before you've paid off your own.

If consolidation strikes you as a good idea, check with your current lender first. You can find out who owns your loans, if you don't already know, through the National Student Clearinghouse (www.nslc.org) Unfortunately for those who went through the process earlier, loans can be consolidated only once.

Q. I have 12 CDs that are laddered over five years. They are worth $10,000 to $20,000 each, and the dividends are reinvested. With rates so low, wouldn't it be better to renew for one year instead of five with the hope that in a year rates will be better?

If I could predict the future, investing would be so much simpler! Lacking that ability, my inclination is to stay diversified.

For those who think ladders are useful only for trimming trees and painting houses, here's the scoop: To create a CD ladder you buy CDs that mature in each year (or at another set interval) over a chosen time period. If you have a five-year ladder, each time a CD comes due, you buy a new five-year CD. That way you earn a higher average yield on the portfolio than you would if you stuck with short-term CDs, and you regularly have the opportunity to reinvest at higher rates.

What if rates go up? You have the option of cashing out one or more of the CDs in your ladder and taking an early withdrawal penalty, typically six months' interest on a CD of more than one year. You could then replace it with another CD of the same maturity date and keep your ladder intact.

If a five-year CD paid 4 percent and a one-year CD paid 2 percent, cashing out after one year and losing half the interest would leave you in the same position as if you had bought a one-year CD in the first place. If the five-year rate is less than double the one-year rate, it will take a longer holding period to break even, but it shouldn't be more than two years. Of course you would not cash out unless the higher rate available on the new CD would more than make up for the six months of lost interest.

The big advantage is that if rates don't go up or barely budge, you will come out ahead.

Q. I got an offer in the mail from Wells Fargo to refinance my mortgage at a 4.99 percent fixed rate over three to seven years without having to pay closing costs. This seems too good to be true. Could there be a catch?

You are smart to be suspicious of any deal that sounds too good to be true. In this case the offer is legitimate, but it's not available to everyone.

Some mortgage lenders offer the same terms to anyone who meets basic qualifications. Others have some products they offer only to targeted customers. That's what you are as far as Wells Fargo is concerned.

The bank says the offer you received is sent only to people who have strong credit and who appear to be in a position to pay off their mortgages in three to seven years. Wells Fargo can offer such a good deal because it's a relatively short-term loan secured by a mortgage on a house in which the borrower has a lot of equity and is very unlikely to default.

Only people who receive an offer from Wells Fargo are eligible to apply.

- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

[Last modified May 18, 2003, 01:30:53]


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