Deadline-oriented? If you or your college- or post-college-age child holds one or more Stafford or PLUS federal student loans, little time remains before the June 30 deadline to consolidate your loans and lock in a lower fixed interest rate.

Each summer, the Department of Education adjusts the interest rate on its two most popular variable-rate student loans based on the three-month Treasury bill. This July 1, those loan rates will climb by 1.84 percent, one of the largest increases in the history of the federally guaranteed student loan program.

The rate lowdown
The rates for Stafford loans for enrolled students, or those in the six-month post-graduate grace period prior to beginning repayment, will bump up from 4.7 percent to 6.54 percent. Rates for Stafford loans already in repayment will increase from 5.3 percent to 7.14 percent. Rates for PLUS loans (Parent Loan for Undergraduate Students) will climb from 6.1 percent to 7.94 percent.

New Stafford loans issued beginning July 1, 2006, will carry a fixed rate of 6.8 percent; PLUS loans will be offered at 8.5 percent. After June 30, students will not be able to consolidate Stafford loans while they are still in school. Stafford rates are federally capped at 8.25 percent, PLUS loans at 9 percent.

To avoid this nearly 2-point hit to your loan rate, you must consolidate your Stafford and PLUS loans with either your current lender or another before July 1. Congress repealed, on June 15, the "single holder" rule that previously required you to consolidate with your current lender if they issued all of your loans.

Consolidation combines your loans into a new, fixed-rate loan; the interest rate is calculated as the weighted average of the underlying loans. The savings can be significant. According to leading education lender Sallie Mae, a borrower with a $20,000 loan balance who consolidates and locks in at 4.75 percent by July 1 will lower his monthly payment by $22 (from $151 to $129) and save $5,123 in interest over the life of the loan.

Too good, but true
Financial aid expert Mark Kantrowitz, who publishes the nonprofit FinAid.org Web site, hopes the marketing blitz launched by lenders to capitalize on the deadline doesn't inadvertently deter borrowers from consolidating.

"The problem is not whether you need to consolidate; you definitely do, to lock in the current low rate. The problem is that the marketing of this has perhaps crossed the line where there is too much frenzy going on," he says. "My concern is, the student may receive these mailings and think this has got to be a scam because it sounds too good to be true and will then react by not consolidating and therefore lose out on the opportunity."

Some aggressive loan marketers have carpet-bombed student borrowers in recent months with fear-baiting "Final Notices," as well as alluring offers of instant cash rebates, additional interest discounts for on-time payments, and numerous other incentives, all in an effort to win their consolidation business. Although no fees can be attached to student loan application or consolidation, lenders are able to improve their margins and offer borrowers more attractive monthly payments by extending loan terms to 20 or even 30 years rather than the program standard of 10 years.