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Student loan rates reach record lows

Borrowing money for college costs more than it has for the past couple of years, but historically the interest rates are still low.

If you are a recent college graduate interested in consolidating all your loans to one fixed rate, you can still land a good deal.

The interest rate on Stafford loans is set at 5.3 percent, a jump from last year's rock-bottom rate of 3.37 percent. Stafford loans are the largest source of student loan funds in the country. Borrowers with a Parent Loan for Undergraduate Students (PLUS) have seen the interest rate jump from 4.17 percent to 6.1 percent.

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These interest rates only apply to Stafford loans and PLUS loans disbursed after July 1, 1998. The current rates remain in effect through June 30, 2006.

Stafford and PLUS loans disbursed prior to July 1, 1998 have slightly higher interest rates, but are still lower than they've been in years.

In the 2000-2001 academic year, student loan borrowers paid 8.19 percent interest on Stafford loans. Then in July 2001, the rate on Stafford loans crashed down to a then record low of 5.99 percent, and continued dropping until July 2005. The rate on Parent Loan for Undergraduate Students (PLUS) loans dipped and rose again as well.

In August, reported that the current projections for interest rates in the 2006 - 2007 school year show rates will continue rising. They estimate that the interest rate on Stafford loans will increase to 5.85 percent and 6.65 percent for PLUS loans.

For details, check out the following chart:

Federal student loan rates
July 1, 2000, to June 30, 2001

Stafford loans:


PLUS loans:


July 1, 2001, to June 30, 2002

Stafford loans:


PLUS loans:


July 1, 2002, to June 30, 2003

Stafford loans:


PLUS loans:


July 1, 2003, to June 30, 2004

Stafford loans:


PLUS loans:


July 1, 2004 to June 30, 2005

Stafford loans:


PLUS loans:


July 1, 2005 to June 30, 2006

Stafford loans:


PLUS loans:


Understanding loan consolidation
Thinking about consolidating your student loan debt? You have until June 30, 2006, before new interest rates kick in. However, if you are a new graduate, you'll want to weigh the pros and cons of consolidation loans fairly quickly. After graduation, you have a six-month grace period before the loan payments begin. By consolidating during the grace period, you save about one-half a percentage point. A summer 2005 graduate could lock in a 4.7 percent rate on Stafford loans, rather than the 5.3 percent rate that kicks in at the start of the repayment period.

The only drawback to consolidating during your grace period is you'll need to start making payments immediately. Not ready to give up those blissful, payment-free months? You could keep much of your grace period by waiting to consolidate until the last month of the grace period..

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. Keep in mind though that once you consolidate your loans, there's no going back.

"Once you consolidate there is no way to un-consolidate," says Patricia Scherschel, vice president of loan consolidation at Sallie Mae. "Consolidation is a one-way street."

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.

Many borrowers sign on for a consolidation loan because they need more breathing room in their monthly budgets. A consolidation loan can lower a borrower's monthly loan payment by as much as 40 percent while stretching out the repayment period.

If your student loan payments add up to more than 8 percent of your gross monthly salary, you're a good candidate for a consolidation loan.

And you don't need multiple loans to enjoy the benefits of a consolidation loan. If your loan amount is high enough, typically $7,500 or more, you may be able to consolidate a single loan. Even though the initial interest rate on that loan won't change much, it will lock in these lower rates for the life of the loan.

Do your homework, first
Before signing on for a consolidation loan, be sure to do plenty of research.

Information, applications and calculators for consolidation loans are available on the Sallie Mae, Collegiate Funding Services, and College Loan Corporation and NelNet Web sites. Information on consolidation loans from the U.S. government is available on the U.S. Department of Education Web site.

Don't forget to contact your student loan lenders. They'll have information on consolidation loans as well. Ask plenty of questions and be as specific as possible. The aim is to find out how your particular mix of student loans might be consolidated. A general example won't do.

Not sure what lender is handling your student loans? The National Student Clearinghouse has a free loan locator service on its Web site.

There are a couple of ways to shave down the interest rate on your consolidation loan even further.

Some lenders will reduce the interest rate by a quarter percent when you sign up to have your monthly loan payment debited from a checking or savings account. A lender may also knock down your rate by 1 percent after you make 48 consecutive on-time payments.

Be sure to ask about these discounts when shopping for a consolidation loan. These rate reductions are available to student loan borrowers as well.

As good as a consolidation loan may sound, it's not for everyone. Anyone participating or planning to participate in a loan forgiveness program may want to pass on a consolidation loan.

Why consolidate your debt when you can cancel it instead?
A college grad can cancel part or all federal education debt by working in public service jobs -- lower-paying professional jobs that serve low-income communities -- or by volunteering. Loan forgiveness programs are available to everyone from teachers to nurses to young doctors and lawyers to Peace Corps volunteers.

Remember when you consolidate student loans your original loans get paid in full and you're issued a brand-new loan. A forgiveness program that offers to pay a portion of an original school loan won't be much use to you. You can't cancel a debt that's already been paid in full.

"You essentially forfeit that forgiveness option when you consolidate," says Martha Holler, a spokeswoman for Sallie Mae.

Student loan borrowers with Perkins loans will want to study their consolidation options carefully. Any Perkins loan borrower who is planning to go back to school may want to keep their Perkins loan out of their consolidation mix.

On an ordinary Perkins loan, the government will pay the interest on the loan while you're in school. Consolidate a Perkins loan and you'll lose that benefit.

"With the Perkins loan, if you consolidate you forfeit the interest subsidy you would get while in school," Holler says. "You want to think of all the consequences."

Borrowers who are approaching the end of their repayment terms may want to pass on consolidation, as well. They may be better off stepping up payments in the next year. With lower interest rates on education loans, they may be able to knock out a good chunk of their remaining principal by boosting their monthly payments. Paying an extra $50 a month is a good place to start. Paying an extra $100 is even better.

One more thing to consider: Many lenders will reduce the interest rate on a student education loan by as much as 2 percent after a borrower makes four years of on-time payments. If you'll be hitting the four-year mark on your student loan payments within the next year, you might be better off keeping your old loans. Weigh your options carefully.

-- Updated: Aug. 25, 2005


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