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Students rush to consolidate loans before July 1

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Consolidation allows borrowers to fix their loans at a single rate that takes the weighted average of the interest rates that were in effect when the borrower first took out the loan. Conversely, the variable rate is tied to the 91-day Treasury bill rate, which was announced Tuesday at 4.84 percent, a hike from 3.0 percent set last year.

Consolidating student loans by June 30 will add up to big savings, according to lender Sallie Mae. For example, a student graduating from college this spring with a Stafford loan balance of $20,000 who consolidates before July 1 at a rate of 4.75 percent will have a monthly payment of $129. If that same student waits until after July 1, at an interest rate of 6.625 percent, his or her monthly payment would jump to $151. Waiting to apply for consolidation until after July 1 would cost the borrower $5,123 more in interest over the life of the loan.

"The clock is ticking," says Pat Scherschel, vice president of loan consolidation for Sallie Mae. "Essentially, [borrowers] have a month. The cost of being one day late is literally several thousand dollars."

That kind of money can be a concern. Financial management corporation AllianceBernstein's recent survey of more than 1,500 college graduates found that paying back loans was a "very or somewhat difficult" task for 74 percent of them, and that the need to repay loans made nearly half of borrowers postpone the purchase of a home and saving for retirement.

As such, loan consolidation is quite a competitive business. Many lenders offer borrowers incentives: If you make your first 36 payments on time, some will reduce the interest rate by 1 percent; or if you allow the lender to withdraw payments directly from your checking or savings account, your loan rate drops by 0.25 percent.

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