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Last Chance for Low Student Loan Rates

Terry Savage

Get started early and avoid the last-minute rush!

No, this isn't about Christmas shopping; I'm talking about refinancing your student loans and locking in the current low interest rates before they move much higher on July 1.

I write this story every year -- but this year it's especially urgent. Interest rates on existing student loans change every July 1, based on the rates set at the 91-day Treasury bill auction held at the end of May. It's quite clear that rates on existing variable-rate student loans could jump at least two full percentage points this year.

But there's another reason to consolidate existing loans, even while you're still in school. Under recently passed legislation, current students will no longer be able to consolidate while still in school.

Right now there is a loophole that allows students to consolidate their loans while they are still in school by first asking that the loans be put into repayment status early. Once the loans are in repayment, they can be consolidated, locking in the repayment interest rate. After the loans are consolidated, students ask for an in-school deferment to delay the repayment obligation until after they graduate.

However, this loophole will end, effective July 1, due to the Deficit Reduction Act that passed in February. This means that current students will no longer be eligible to elect early repayment status -- thereby restricting them from consolidating while still in school -- after July 1. So, if you're currently a student with loans, view this short window as your last chance to lock in today's low rates.

Rates Sure to Jump

The current rate on existing Stafford loans is 4.7%. The rate is based on 91-day T-bills plus 1.7 percentage points. With the current 91-day Treasury bills at about 4.6%, the rate on existing loans could jump to 6.3% or higher on July 1.

The consolidation rate uses the weighted average of rates on a borrower's loans, rounded up to the next one-eighth of one percent. If you're still in school and paying current rates, the consolidation rate is 4.75% on Stafford loans. If you're already repaying a Stafford loan, the consolidation rate is 5.375%. That, too, will increase in July.

The difference between locking in now and waiting could cost you thousands of dollars in interest over the life of your loan, depending on the amount you've borrowed and the number of years in repayment.

Fixed Rates Set for New Loans

There's more bad news about future rates on Stafford loans. Under the new legislation, future Stafford loans will carry a fixed rate of 6.8%. Every year a new fixed rate will be announced. You'll be stuck with that rate until the loan is repaid or ultimately consolidated after graduation.

Rates on PLUS loans made to parents are currently 6.1% for loans disbursed between July 1, 2005, and June 30, 2006. The consolidation rate for those loans for parents of current students is now 6.125%. PLUS loans are also tied to the T-bill rate, and will jump sharply higher in June. Even worse, new PLUS loans for parents made after July 1 will carry a fixed rate of 8.5%.

There's nothing you can do about the higher rates on future loans. The same bill cut more than $12 billion from the federal student aid program. Before the bill was passed, I wrote a column urging students and parents to protest. But the big student loan lenders put the pressure on Congress to make refinancing more difficult.

So here's the message: If you have any student loans or PLUS loans for parents, start the consolidation process now.

How to Consolidate