Class of 2007 Should Shop Around for Best Loan Deals

CONGRATULATIONS, Class of 2007!

Expect a mailbox full of missives to help you transition from the college campus to the real world: congratulatory cards (with checks enclosed) from family and friends, a few job offers and plenty of enticements from lenders eager to handle your student loans.

Although the first two are certainly more welcome, it pays to spend time considering the latter. More than two-thirds of graduates leave college with student loan debt, according to the Department of Education. Their average tab: $19,200.

In recent years, as the variable interest rates on the Stafford loan dipped to historic lows of 2.77% (3.37% in repayment) in 2004, student loan advice for recent graduates could be summed up in a single word — consolidate. Not so for this year's grads, who face current rates of 6.62% during the in-school and grace periods, and 7.22% during repayment.

"The use of consolidation to lock in a low rate no longer applies," says Mark Kantrowitz, founder of FinAid.org. "Students have to be more proactive about getting the best deal."

Thanks to two recent changes, the Class of 2007 faces the added burden of mixed loans — some fixed rate, some variable, some already consolidated. (Loans disbursed after July 1, 2006, carry a fixed interest rate of 6.8%, while those disbursed prior have variable rates up to a maximum of 8.25%. That date also marked students' last chance to consolidate loans while still in school.)

To get started off right, here are seven considerations for this year's grads:

Not you? Before you gloat, consider joining their ranks. Consolidating before your six-month grace period runs out snags you a lower consolidation interest rate; currently 6.625% instead of the 7.25% you'd get post-grace. For a grad carrying a $20,000 balance, that's a difference of $1,795 in interest paid over the life of your loan.

With fixed-rate loans in the mix, consolidating may not work out to your advantage. Someone carrying $20,000 in Stafford loans — $15,000 consolidated at 6.625% and one $5,000, 6.8% loan — would pay a total of $7,458 over the life of the 10-year loans. That's $100 less than the total interest you'd pay by consolidating all the loans under a 10-year repayment schedule.

Start by making a list of your loan amounts and lenders (access your loan data here at the Department of Education's National Student Loan Data System), then work your way down the list of lenders to compare offers.

Call your current lender(s) to check the fine print first, says Kantrowitz. It may actually be cheaper to stay put. "Many lenders have included fine print that says you have to repay any discounts if you switch," he says. That includes the 4% origination and default fees assessed at Stafford loan disbursement, which many lenders waive.

"Focus on discounts that are immediate in nature, and that you can't lose," he advises. Discounts that take time to earn, such as making a set amount of payments on time, are worth progressively less the longer they take to kick in. They are also tougher to earn. "Less than one-quarter of students make their first 36 payments on time," Kantrowitz says. One missed or adjusted payment and you're right back at the starting line.

If you take steps to lower your payment, aim to increase it again as soon as possible, says Johnston. "There is no penalty for prepayment," she adds. Ideally, you should aim to make your original monthly payment, but even an extra $10 a month helps. (In the case above, it would help you pay off your consolidated loan three years sooner, and cut your total interest paid by $1,836.)