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On money

Students beware: Loan rates on the rise

By HELEN HUNTLEY
Published April 17, 2005

Rising interest rates mean student loans are likely to get more expensive this summer. However, there's still an opportunity to lock in lower rates if you are finishing college or if you are repaying education loans that never have gone through consolidation.

"We have the lowest interest rates in the history of the student loan program right now," said Martha Holler, spokeswoman for lender Sallie Mae. When interest rates are reset July 1, they could rise nearly 2 percentage points, she said.

The rates on federally guaranteed education loans change each July based on the results of the last Treasury bill auction in May. Sallie Mae calculated what the new rates would be if the May results match those for the April 4 auction:

Rates on Stafford Loans would rise from 2.77 percent to 4.49 percent for students in school and from 3.37 percent to 5.09 percent for former students in repayment. Rates on parents' PLUS loans would increase from 4.17 percent to 5.89 percent, according to the estimate. Higher rates mean higher payments and thousands of additional dollars of interest over the life of a typical loan.

Consolidation, which may involve one loan or many, gives borrowers the opportunity to lock in a fixed rate and take up to 30 years to repay their debt. The best rates go to borrowers in the six-month grace period after leaving school. Until July 1, they can consolidate at 2.875 percent interest, or even less by taking advantage of lender incentives.

Many lenders shave off a quarter point if borrowers sign up for automatic payments from a bank account plus a full percentage point after 24 months of on-time payments. Sallie Mae subsidiary Southwest Student Services Corp. is even more generous, subtracting 2 percentage points for 24 months of on-time payments, making the rate as low as 0.625 percent. That's a reason to comparison shop before signing with a lender.

Consolidation is not available if a student is still attending classes at least half time. It may not be the best option for students who hold Perkins Loans and could be eligible for a loan forgiveness program.

I am considering closing out a Roth IRA that has gained about 1.2 percent since I opened it four years ago. I know if I withdraw all the money, I will pay taxes and a 10 percent penalty. Will this be figured on the whole amount of the withdrawal or just the 1.2 percent I have earned?

You can withdraw your original contributions without tax or penalty. The investment return above your contributions is taxed and may be penalized if you fail to meet the requirements for a qualified withdrawal. The first requirement is that it has been five years since Jan. 1 of the first year you made a contribution to any Roth account. The second requirement is that you've met at least one of several conditions, which include being 591/2 or older, disabled or a first-time home buyer taking out up to $10,000 for a home purchase.

If performance is the issue, move your IRA rather than withdrawing the money. You can have a Roth IRA with a bank, brokerage or mutual fund company. The easiest way to make a switch is to fill out a transfer of assets form with the new company and have it get the account from the old company. If you prefer to close the old account and have the money sent to you, just be sure to accomplish the rollover to the new account within 60 days.

Can EE savings bonds be rolled over into other kinds of bonds without paying immediate taxes?

No. That option is no longer available since the government stopped issuing HH bonds last year.

I have some HH bonds that will mature soon. Of course, I never paid tax on the interest earned on the original EE bonds used to purchase the HH bonds. Can the HH bonds now be converted to Treasury notes or other instruments without paying taxes? Or do I now claim the interest, pay the taxes and reinvest in something of my own choosing.

The latter. The deferred tax on your bonds will have to be paid. If you want to invest in Treasury securities, consider opening a TreasuryDirect account (www.treasurydirect.gov) and managing your investments online.

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 huntley@sptimes.com or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.

[Last modified September 2, 2005, 15:59:22]