DO YOU HAVE a federal student or parent loan? A lovely surprise is coming your way, starting July 1. The interest rate will fall - probably by a lot.
You won't know the new rate until the end of May. But it's expected to be about 2 percentage points lower.
If you make the right moves, you can lock in some additional discounts. Your total rate on student loans could dive to a little over 5 percent.
So you'll want to act. This column lists several different groups of borrowers. Look through the list to find your situation and what, if anything, you should prepare to do.
Every July 1, the government changes the rate on student loans and PLUS loans for parents. It goes up or down, depending on the rates on Treasury bills.
Right now, you're paying 8.19 percent on new Stafford student loans and 8.99 percent on PLUS loans. The new, basic rate could drop to a little over 6 percent for students and 7 percent for parents. With discounts, you could pay even less.
Here's how the rate cuts apply to different types of borrowers:
If you're out of school and repaying your original student loans. Your interest rate will drop automatically on Stafford loans taken after 1992. Written notices will come out in June, saying what you new payments are.
If you have your original PLUS parent loans. Repayments always begin 60 days after you borrow, whether or not your student is still in school. Your rate will drop automatically, just as the student rate does.
If you have the monthly payments withdrawn automatically from your bank account. You can save another 0.25 percentage points.
If you want to consolidate your student or parent loans. After July 1, you'll be able to lock in a new, low fixed-rate that lasts for the life of the loan. The exact rate will be announced at the end of May. Students might get about 6.8 percent on recent loans. (Earlier loans have different rates.)
Loan consolidation needs a little more explaining. Special discounts often are available.
To "consolidate" means that you combine all the different loans you took during your student years into a single loan, at a new interest rate.
There are two main sources of consolidation loans: private lenders, such as banks, the Collegiate Funding Service (www.cfsloans.com or 888-423-7562) and Sallie Mae (www.salliemae.com or 888-272-5543); and the federal government, through its Direct Loan Consolidation program (www.loanconsolidation.ed.gov or 800-557-7392).
There are two potential discounts, according to the Education Department:
If you apply for a consolidated Stafford student loan within six months of leaving school. You save an additional 0.6 percentage point on the rate. Private lenders will consolidate two or more loans. The government's Direct Loan program will "consolidate" even a single loan.
Right after school is the best time to apply. New graduates, take note.
If you consolidate a student loan or PLUS loan through the government's Direct Loan program, between now and Sept. 30. You can get an additional rate cut of 0.8 percentage point. To keep this rate, you have to pay on time for the first 12 months. "On time" means no more than six days late.
If you miss one payment date, the rate cut still applies to your first 12 months. After that, you would revert to whatever your normal rate would have been on a consolidation loan.
If students consolidate with the government after July 1 and use all the discounts, including the 0.25 percent for automatic payments. Your total loan rate could drop to an amazing 5.2 percent.
If you have already consolidated your loans at a fixed interest rate. You cannot consolidate (refinance) with the government again, unless you have an outstanding loan that wasn't consolidated before.
Private lenders give a variety of discounts, too. At Collegiate Funding Services, you would get 1 percentage point off your rate, after making your first 36 loan-consolidation payments on time.
At Sallie Mae, there is no such discount for consolidation loans. But you would get 2 percentage points off your original loans, after making your first 48 payments on time.
If you have PLUS loans. You can consolidate them, too, although no discounts apply.
If you don't consolidate. Every July 1, your rate will go up or down, depending on what happens to Treasury bill rates. So this looks like a great year to lock in your payments.