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Lock in low student loan rates

For many 2005 graduates, it will soon be pay-up time.

The six-month grace period on student loan payments has begun for anyone who tossed up a graduation cap in May or June.

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It's time to start thinking about those pesky student loan obligations and map out a payment strategy.

The good news is the interest payments. They've never been better. The bad news is time. You only have until June 30, 2005, to lock in the low rates. New rates go into effect July 1. And the new rates are nearly 2 percent higher.

Last July, the interest rate on federal Stafford loans dropped from 3.42 percent to 3.37 percent, the lowest rate in the 36-year history of the student loan program. However, beginning July 1, a 1.93 percent increase on Stafford loans will apply bringing the interest rate to 5.3 percent and up to 6.1 percent for PLUS loans (parent loans).

This interest rate only applies to Stafford loans disbursed after July 1, 1998. Stafford loans disbursed prior to July 1998 have slightly higher interest rates than more recent loans, but those interest rates are still lower than they've been in years.

With student loan rates this low there's never been a better time to check out a federal consolidation loan. It's a great way for a borrower to lock in a super-low rate for the life of the loan.

How consolidation works
The Stafford program is the largest source of student loan funds in the country. In the 2003-2004 school year 6.2 million students borrowed over $40 billion in Stafford loans, according to the College Board's Trend in Student Aid survey.

The interest rate on a consolidation loan is determined by taking the weighted average of interest rates on the federal education loans the student has and rounding up to the nearest one-eighth of a percentage point, capped at 8.25 percent. The final rate will differ from student to student.

With a federal consolidation loan, your lender pays off the balances of all the loans you choose to consolidate and then issues you a new loan. The rate is fixed. A consolidation loan may lower your monthly loan payments by as much as 40 percent and it can also stretch out your repayment period.

The program offers a discount for students who enter into consolidation during the six-month grace period after graduation. "Basically, you can get a 60-point discount if you lock in during the grace period," says Barry Morrow, chief executive officer at Collegiate Funding Services.

"You're almost crazy if you don't look at this," says Morrow.

That's important because the interest rate on your consolidation loan is based on the interest rates of the loans you already have. So normally, if you get your consolidation loan during the grace period, you'll be locking in the lowest available rate.

Federal student loan rates
July 1, 2000, to June 30, 2001
Stafford loans: 8.19%
PLUS loans: 8.99%
July 1, 2001, to June 30, 2002
Stafford loans: 5.99%
PLUS loans: 6.79%
July 1, 2002, to June 30, 2003
Stafford loans: 4.06%
PLUS loans: 4.86%
July 1, 2003, to June 30, 2004
Stafford loans: 3.42%
PLUS loans: 4.22%
July 1, 2004, to June 30, 2005
Stafford loans: 3.37%
PLUS loans: 4.17%
July 1, 2005, to June 30, 2006
Stafford loans: 5.3%
PLUS loans: 6.1%

For example, last year if a student consolidated during the six-month grace period, the Stafford loans carried an interest rate of just 2.77 percent, rather than the 3.37 percent rate that would have kicked in at the start of the repayment period. By consolidating during that grace period, a student with $20,000 in Stafford loans could have saved $666 in interest over a 10-year repayment period. And Stafford loans probably make up the bulk of students' debt.


-- Updated: June 6, 2005




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