Student-loan consolidation rules may have economic effects

Consolidating student loans has traditionally been a safety net to lenders and a measure of convenience to borrowers. But with interest rates at an all-time low, some believe the current policy under which student loans are consolidated will have long-term economic consequences.

A new study has found that the current policies of the Student Loan Consolidation Program may result in long-term inequities among borrowers and increased costs to taxpayers if not reformed.

While the interest rates on loans vary while a student is still in school or before he or she chooses to consolidate, under the Student Loan Consolidation Program, once a student does consolidate that loan it is locked in at an interest rate that remains fixed for the life of the loan.

Some believe this policy should be changed so that the interest rates students pay vary with the economy.

According to the report "The Fiscal and Social Costs of Consolidating Student Loans at Fixed Interest Rates," this results in some people paying higher interest rates than others, depending on what year they consolidated their loan.

The report states while an individual who consolidated his or her loans in 2000 pays an annual interest rate of 8.25 percent, someone consolidating loans now will pay an annual interest rate of 3.5 percent.

This means a person consolidating a $22,000 loan now will pay $14,000 less in interest than someone who consolidated the same amount three years ago.

Because only federal loans that fall under the Federal Direct Loan Program and the Federal Family Education Loan Program are eligible for fixed interest-rate consolidation, taxpayers play a major role in the payment of interest.

With consolidation increasing the lifespan of a student loan from the average of 10 years to 30 years, and the number of consolidations increasing due to low interest rates, authors of the report maintain that taxpayers will pay an estimated $14 billion in interest on existing loans and $21 billion on loans consolidated between 2005 and 2011. An estimated 65 percent of college students have federal student loans.

However, with the reauthorization of the Higher Education Act scheduled for this year, there is a possibility that students may no longer be able to consolidate loans at fixed interest rates.

Dan Mann, director of financial aid, said while he believes loan consolidation is an advantage to students, the real advantage lies not with the technicalities of fixed and variable rates, but with the interest rate itself.

According to Mann, if interest rates increase in the future, then it is at the advantage of the student to be locked in at a fixed interest rate, but if rates continue to drop, then it would be at the advantage of students to be in a variable interest rate.

Mann said he is personally in favor of anything that saves the student money.

"I support things that help students or help reduce costs," he said. "Some options in place through the program are beneficial to students. I would hate to see those benefits go away."