Student loan interest rates likely to drop

Federally backed lending is tied to three-month rate on Treasury bills

Level could be lowest ever

Determination to be made after auction scheduled to be held next week

May 20, 2002|By Eileen Ambrose | Eileen Ambrose,SUN STAFF

Borrowers repaying student loans may have more money in their pockets beginning this summer, when the variable interest rates on their loans are expected to drop to the lowest level in the program's history.

Variable interest rates on federally backed student loans are adjusted each July. They are tied to the three-month Treasury bill rate as of the last auction in May, which occurs next week.

With recent rates holding steady, loan experts are predicting that the rate on Stafford loans now being repaid could be around 4.1 percent, a drop of nearly 2 percentage points.

The rate would apply to Stafford loans made after July 1, 1998.

Students, borrowers whose loans are in deferment and new graduates in a loan grace period are expected to have an even lower rate of about 3.5 percent, down from 5.39 percent.

And the rates on PLUS loans, taken out by parents, and older Stafford loans also are expected to drop, though not as much.

"Borrowers don't have to do anything to take advantage of the rate change," said Patricia Scherschel, consolidation product executive for student loan provider Sallie Mae. "The interest rates on their loans would be automatically adjusted downward."

It's possible rates also could fall next year, but some experts recommend that borrowers consolidate their loans after July 1 to lock in the lowered rate. By consolidating, old loans are paid off and the debt is rolled into a new loan at a fixed rate.

"There is simply no better opportunity to lock in a low fixed-rate loan," said Mark Brenner, general counsel with the College Loan Corp., a student loan provider in Washington.

Brenner calculated that a borrower with a $20,000 loan could save about $5,000 in interest over the life of a 20-year loan by consolidating at the anticipated new rate.

Consolidation has been a way for borrowers to lock in lower rates and save money. This perk was threatened last month when the Bush administration, looking for revenue sources to make up a shortfall in the Pell Grant budget, proposed requiring a variable rate for consolidation loans.

The White House quickly backed off the proposal after strong opposition in Congress.

Fixed rates on consolidated loans are based on the average of student loan rates, with more weight given to loans with bigger balances. The rate is then rounded up to the nearest one-eighth of 1 percent.

Borrowers seeking to consolidate a loan should first check with their lender, said Bob Murray, a spokesman with USA Funds in Fishers, Ind., the nation's largest loan guarantor. If the loans come from multiple lenders, the borrower can shop around, he said.

Some companies offer additional discounts. For example, College Loan Corp. will reduce an interest rate by another quarter-point if a borrower repays the loan through automatic bank account deductions, Brenner said.

However, consolidating has drawbacks.

You may give up some discounts on existing loans, Murray said. Or, those with hefty balances may opt for a longer repayment period, and wipe out any interest savings they might have gotten from the lower rate, he said.

Be aware, once you consolidate loans you can't do so again except in certain circumstances, such as going back to school and taking out a new loan or including loans that weren't consolidated earlier.

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