If you don't consolidate your student loans by Oct. 1, you may pay higher interest rates and fees for your loans, and your hair will fall out.

OK, we made up the part about the hair. But the language in some marketing campaigns by student lenders and loan consolidators is pretty alarming.

The website for EdFed, a student loan consolidator, warns, in red type, that "if you miss the (Oct. 1) deadline and consolidate your federal student loans after that date, your consolidated interest rate could be at least 1.25% higher!"

The website for ScholarPoint cautions that "Congress recently passed new legislation that will significantly reduce or eliminate the ability for ScholarPoint and other education finance companies to offer money-saving borrower benefits."

In past years, loan consolidation allowed borrowers to lock in current interest rates, a money-saving strategy three years ago, when rates were at all-time lows. But last year, Congress eliminated variable rates for Stafford loans. Loans issued after July 1, 2006, have a fixed rate of 6.8%.
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What's behind the latest push? The $20 billion student-aid bill approved by Congress earlier this month boosts federal aid for low-income students and gradually lowers rates on new federal student loans.

But to pay for these provisions, Congress slashed the subsidies the government pays private lenders that provide federally guaranteed student loans. President Bush is expected to sign the bill.

Lenders warn that the subsidy cuts will force them to cut borrower benefits, such as interest-rate discounts for borrowers who make a certain number of on-time payments.

Borrowers who consolidate before Oct. 1, when the subsidy reductions take effect, will still be able to take advantage of existing benefits, the lenders say.

Consolidating as many loans as possible before Oct. 1 is clearly in the lenders' best interest, because those loans will still be eligible for the higher subsidies.

But will consolidation benefit you? Possibly. You should consider consolidation if:

•The borrower benefits are worthwhile. When comparing benefits, it's important to be realistic about the likelihood that you'll fulfill the requirements to receive them.

For example, many lenders offer a 1 percentage-point rate reduction after 36 consecutive on-time payments, but fewer than 20% of borrowers qualify for it, says Mark Kantrowitz, publisher of FinAid.com, a financial aid website.

Look for an immediate reduction in your principal or interest rate, suggests Robert Shireman, director of the Project on Student Debt.

In recent months, several lenders have sweetened their discounts, says Kevin Walker, CEO of SimpleTuition, a loan-comparison website. Some offer a rate cut of up to 1 percentage point after 12 straight on-time payments, he says. Others offer an immediate discount of 1 point for borrowers who arrange to have payments automatically withdrawn from their checking accounts, Walker says.

Lenders haven't said how much they'll reduce their borrower benefits after Oct. 1. Walker says he thinks they'll continue to offer discounts but won't be as generous. About half a dozen lenders have pulled consolidation offers from SimpleTuition's site since Labor Day, Walker says, for fear they won't be able to process loans before Oct. 1. With the subsidy cuts imminent, he says, "They're waiting to see what they can afford."

•You have some variable-rate loans, and you're still in your grace period. If you graduated this spring, you probably have a mix of variable-rate and fixed-rate loans. Loans issued before July 1, 2006, still have a rate that's adjusted every July 1, based on the rate for short-term Treasury bills. On July 1, the rate for those loans rose to 7.22%.

If you graduated this spring and are in your grace period — the six-month window before you're required to start repaying your loans — you can consolidate based on your in-school payment rate, now 6.62%. The consolidation rate is based on the weighted average of all your federal loans, rounded up to the nearest one-eighth of 1%.

For recent graduates, consolidation rates will range from 6.63% to 6.83%, depending on whether fixed-rate loans are included, Walker says.

FinAid.com offers a loan consolidation calculator; to find it, go to finaid.com and click on the "calculators" link.

•You're having a hard time making monthly payments. Most federal student loans have a 10-year repayment term. Consolidating allows you to lower your monthly payments by extending the term for up to 30 years, depending on the size of your loans.

Keep in mind, though, that extending your loan will increase the interest you'll pay over the course of the loan, Kantrowitz says. While lenders promote consolidation as a way to make payments affordable, "The reality is that it makes the loans more expensive," he says.

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