The variable interest rate on federal education loans is going up nearly 2 percentage points in July, which means students and parents have until then to consolidate loans to lock in current lower rates and potentially save thousands of dollars.
Each July, the variable rate on federal loans is adjusted based on the three-month Treasury bill rate at the end of May. As of yesterday's T-bill auction, the variable rates on Stafford student loans and PLUS loans for parents will go up 1.84 percentage points in July.
For the next year, the rate will be 6.54 percent for Stafford loans in grace and deferment periods, 7.14 percent on Stafford loans in repayment and 7.94 percent for Parent Loan for Undergraduate Students, or PLUS loans.
The rate increase is one of the largest in the federal loan program's history, lenders said. That - along with other coming changes in the loan program - are expected to spur students and parents to consolidate loans.
By consolidating, one or more loans are converted to a new fixed-rate loan. A few years ago, when the economy was weaker, interest rates continually fell and consolidation grew. It reached a fever pitch a year ago, when loan rates were the lowest in the program's 40-year history. The volume of consolidations this year isn't expected to be as high, but still brisk, experts said.
Tim Bornemeier, managing director of student loan provider Nelnet, said his company has seen a "strong push" by students to consolidate recently. That's because, beginning in July, students will no longer be able to consolidate while still in college because of changes in the federal program, he said.
The interest rate for consolidation will be slightly higher than a borrower's current rate. The consolidation formula uses a weighted average of rates on a borrower's loans and then rounds it up to the nearest one-eighth of 1 percent.
By consolidating before July, the rate would be 4.75 percent on Stafford loans for students in a grace period or deferment; 5.375 percent for those already in repayment; and 6.125 percent on PLUS loans.
Consolidation "would make sense particularly for those with higher balances," said Bob Murray, a spokesman with USA Funds, a guarantor of student loans.
College Loan Corp., a student loan provider, figures a new graduate with $20,500 in loans will save $2,948 over 10 years by consolidating now. A borrower already repaying Stafford loans would save $2,195.
The savings can be even higher if a borrower is eligible for discounts. For instance, lenders often drop the rate by 1 percentage point if a borrower makes on-time payments for three years. Many, too, trim the rate by a quarter-point if a borrower repays through automatic deductions from a bank account.
There are other changes in the student loan program coming in July. New student and parent loans issued July 1 and thereafter will no longer carry a variable rate. The fixed rate going forward will be 6.8 percent on Stafford loans and 8.5 percent on PLUS loans.
Any student or PLUS loans that have been made before then and not consolidated will remain variable.
Even with rising interest rates and new loans carrying a fixed rate, there will still be a need for consolidation in years ahead, Bornemeier said.
Borrowers can extend the repayment period on loans by consolidating, a benefit for those having difficulty meeting their monthly payments. For instance, those with $60,000 or more can extend the term to 30 years, he said.
By lengthening the repayment period, though, you can end up paying more in interest over the life of the loan, even if the interest rate is low, Murray said.