Consolidation Loan Interest Rate

Hi Betsy,

I consolidated my loans prior to 1998, and at that time the interest rate was 8.25 percent. My lender gives me a 0.25 percent deduction for using their direct payment option, but unlike other lenders they don’t offer decreased interest rates for people who make a number of consecutive, on-time payments. I just find it ridiculous that, even though I’ve been paying my loan on time for many years I still pay such a high interest rate. Others who have consolidated their loans now pay 3 – 4%.

Help! I work hard, pay all my bills on time, have great credit but I feel that being locked into this high rate is unfair and possibly criminal.

Thanks,
Lou

Hi Lou,

I can understand why you would be frustrated about having a higher interest rate than some other consumers are paying, however I can assure you that not only is it not criminal, it’s the law. Student loan interest rates have always been set by Congress, so the rate you have was the prevailing rate at the time. The lower rates you mentioned were the rates that were required by law in the early part of this decade.

Consolidation interest rates are set (again, by federal law) by taking the weighted average of the underlying loans and rounding up to the nearest ⅛ of a point. No matter who your lender was at the time when you consolidated, your rate would have been the same. In addition, the law does not allow refinancing for federal student loans, so I’m afraid you’re stuck with your current rate.

You could consider paying the loan off with a low-interest consumer loan, such as a home equity loan or personal loan. However, you would lose many federal student loan benefits such as deferments and discharges if you encounter difficulty repaying your loans. You would also lose the ability to claim the interest paid on your taxes.

I’m sorry the news isn’t a bit better, but at least you know that your lender is not the one setting your interest rate. Please let me know if you have further questions.

Regards,
Betsy