Does Consolidating Student Loans Save Money Like a Refinance?

The Dakota Education Alternative Loan (DEAL) is a private student loan offered by the Bank of North Dakota (BND). Federal and private consolidation loans cannot be consolidated together. If you want to consolidate private student loans, check with the lender that currently holds the loans to ask if they offer a consolidation program or a unified billing option. A list of lenders offering private consolidation loans can be found at www.finaid.org/privateconsolidation. BND offers the DEAL Consolidation Loan Program for borrowers interested in consolidating DEAL loans. The DEAL consolidation loan may save money if interest rates have decreased. The DEAL consolidation loan offers both fixed and variable rates. The variable rate DEAL consolidation loan has an interest rate that is the same as the current variable rate on new DEAL loans, the 3-month LIBOR index plus 2.5%. The fixed rate DEAL consolidation loan has an interest rate that is the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest 1/8th of a point, but with the interest rates on non-DEAL loans and on variable rate DEAL loans replaced with the current fixed rate on new DEAL loans, the FHLB 10-Year Advanced Rate plus 3%. (Note that these interest rates are expressed as the sum of an index rate, such as the 3-month LIBOR index or the FHLB 10-Year Advanced Rate index, with a margin rate. Borrowers sometimes get confused and think that the margin rate is the entire interest rate. It is not. The interest rates can be much higher than the margin rate because of the addition of the index rate.) For both fixed and variable rate DEAL consolidation loans, borrowers who are from North Dakota or who attended a North Dakota college get a 1% reduction in the interest rate. The current fixed rate on the DEAL Consolidation Loan is about 4.5% higher than the current variable rate. Borrowers who choose the variable rate option are effectively betting that the variable rate won't rise by more than 4.5%, on average, over the life of the loan. But the current unusually low interest rate environment probably won't last for much longer, and a 4.5% increase in the interest rate is certainly possible. The 3-month LIBOR index, for example, dropped from about 5.7% in September 2007 before the credit crisis to about 0.25% in December 2009. If the LIBOR index can drop by more than 5%, it can just as easily increase by 5% or more. The highest 3-month LIBOR index rate in the last two decades was 7.125% in January 1991, and even higher a few years before that. The variable rate may be a reasonable option if the borrower is capable of repaying the loan in full if interest rates rise too much. Otherwise the borrower may be better off with the fixed rate, which also provides more predicatable monthly loan payments. The interest rates on federal and private student loans are among the best interest rates available on unsecured loans. You might be able to get a better rate on a secured loan, like a home equity loan or line of credit or a cash-out refinance, if you have excellent credit. (Most recent college graduates have thin or nonexistent credit histories. It takes several years of paying all accounts as per the agreement before a college graduate can build a good credit history.) But then you will lose the flexible repayment, deferment and forgiveness options on the federal education loans, as well as the student loan interest deduction, and risk losing your home if you have trouble repaying the loan.