Consolidate student loans to free up cash

Q: I'm considering consolidating my student loans as a way to free up some cash. Is this a good idea and how would I go about doing it?

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A: Consolidating your student loans is a great no-cost option for "finding money." Interest rates on federal student loans are at — or near — their lowest levels in history. If you took out your loans (most people have more than one) when rates were higher, you have an opportunity to roll all of them into one single monthly payment at a lower interest rate. The other benefit of consolidating is that you lock that rate in. When you took out the loans, most likely they were variable-rate loans; when you consolidate, you move to a fixed-rate product. Here's how you do it.

Get a grip on your balance. If all your loans are through a single lender, you have no choice but to consolidate with that lender, but if you've got loans through more than one source, you're not locked into working with them again.

Call several lenders. Ask what they can do for you, then shop around further on the Web. (Type “student loan consolidation” into any browser and you'll get hundreds of hits.)

Ask about added benefits. Rates are likely to be about the same from all lenders. Instead, look for future rate discounts for good behavior and a discount for having monthly payments directly debited from your account.

Don't delay. If you consolidate while you're still in the six-month grace period after school ends but before repayment begins, you get an extra break (as much as 0.6 percent) on the interest rate. The trade-off is that you have to start repayment immediately.

Carefully consider the terms. Most student loans are scheduled to be paid back over a 10-year time frame, but many people extend the term when they consolidate. While that might increase the total interest you pay, it will give you some relief in the short run.

For more ideas on how to find money you didn't know you had, check out my new book, Pay It Down! From Debt to Wealth on $10 a Day.

Jean Chatzky’s Bottom Line:
Why you might not want to cut up that credit card. Credit-card companies keep close track of how much credit is available to you and how much of that you're using. This measure is called "balance and burden." You can increase your credit score by regularly using 20 percent to 30 percent of the credit available to you. But the way you get to that level is not by canceling and cutting up your credit cards. Unless you've got a serious problem with credit-card debt, canceling cards will have a negative impact on your score because you will reduce the amount of credit available to you. And, for the very same reason, never cancel credit cards right before you apply for a mortgage, auto loan, or other big loan.

Jean Chatzky is the financial editor for “Today,” editor-at-large at “Money” magazine and the author of “Talking Money: Everything You Need to Know About Your Finances and Your Future.” Her latest book, "Pay It Down: From Debt to Wealth on $10 a Day," is now in bookstores. Copyright ©2004. For more information, go to her Web site, www.JeanChatzky.com.