Enjoy lower rates for a higher education

For months, homebuyers have seen mortgage rates hover at or near record lows. Car shoppers have watched financing deals dive to zero percent. And now, the holders of certain student loans can also reap the rewards of our history-making, low-rate environment.

Annual reset ushers in relief

Interest charges on variable-rate Stafford and PLUS student loans originated before July 1, 2006, recently tumbled to their lowest levels in the history of the programs. (Stafford and PLUS loans originated after this date already have fixed rates and, therefore, are not affected.) Following are the new variable rates that went into effect on July 1:¹

• Stafford loan (while in school or during grace period): 1.88%
• Stafford loan (during repayment period): 2.48%
• PLUS loan: 3.28%

These rates represent a 1.73 percentage point decline from the interest rates in effect for the 2008-09 school year. The previous low was 2.77% for the Stafford loan during the 2004-05 academic year (in school/grace period rate).²

Consolidate your variable loans at one low rate

Perhaps even more enticing for parents, grandparents and students is the ability to consolidate variable Stafford and PLUS loan balances and lock in these historically low rates for the duration of the payback term. This could potentially help borrowers save thousands of dollars in interest charges.

You can consolidate only once, so with rates unlikely to reset any lower next year, now may be an ideal time to pool your student loan balances and switch to a fixed-rate loan. Keep in mind that if you previously consolidated your variable-rate student loans, you are not eligible for this option.

Based on the July 1 reset, the current consolidation rates are:²

• Stafford loan (while in school or during grace period): 2.00%
• Stafford loan (during repayment period): 2.50%
• PLUS loan: 3.38%

If you're in school or in the grace period phase (six months after graduation), you can consolidate your variable-rate loans and receive the lowest consolidation rate. Of course, there is a tradeoff: You’ll forfeit any time remaining in your grace period because you’ll have to start repaying your loan. (After consolidating, your first bill will typically arrive within 60 days.) Timing is everything, so consider applying for your consolidation loan approximately halfway through your grace period. That way, you’ll be able to take advantage of the entire grace period while consolidating into the lowest possible interest rate.

As you can see from the example below, consolidating at this year’s grace period rate can deliver significant savings. Compare the monthly payment and total interest charges associated with this year’s Stafford loan rate of 2.00% with last year’s rate of 3.64%. Assuming a loan balance of $25,000 with a standard 10-year repayment term, consolidating in 2009 versus 2008 would have resulted in an overall savings of more than $2,000.

$25,000 loan balance	Monthly payment	Total interest paid over life of loan
2008 consolidation rate/grace period (3.64%)	$248.86 for 10 years	$4,863
2009 consolidation rate/grace period (2.00%)	$230.03 for 10 years	$2,604

Of course, no one can predict next year’s consolidation rates, but considering the record-low rates of today, they are likely to move higher. If, for example, rates revert back to where they were last year, it would make sense to consolidate now rather than miss out on the opportunity to save thousands of dollars in interest charges over the term of the loan.

Combine your fixed-rate and variable-rate loans

If you have a combination of variable-rate (originated before July 1, 2006) and fixed-rate (issued after July 1, 2006) loans, you can consolidate them into one low-rate loan. The overall interest rate on the combined loan will be a weighted average of the rates on the individual loans. Of course, before moving ahead with any consolidation option, you should consult with your financial advisor.

Keep your original payback terms

If you’re planning on consolidating your loans, also consider maintaining the payback terms of the new loan at the standard 10-year timeframe. Enticed by the prospect of lower monthly payments, some borrowers extend their repayment terms when they consolidate their student loans. It’s best to avoid this temptation because you’ll pay more in interest over the life of the loan, which would defeat your original goal of saving money by locking in a low interest rate.

For more information on current student loan rates and consolidation options, go to loanconsolidation.ed.gov.