Federal student loan interest rates hit an all-time low Wednesday, offering a golden opportunity for new and past borrowers to save thousands of dollars in interest throughout the life of their loans.
Rates have dropped four years in a row and are less than half of what they were in 2000. The new rate is 2.77 percent for anyone in school or in a grace or deferment period. For those repaying loans issued after July 1, 1998, the rate is 3.37 percent. Parents borrowing money for undergraduate students through the federal PLUS program will enjoy some relief at a lowered 4.17 percent.
Federal student loan rates are adjusted annually based on a snapshot of the 91-day Treasury Index taken at the end of May. While tuition and fees have been increasing steadily over the past few years due to tight state budgets, the Federal Reserve until Wednesday had continually cut short-term interest rates to boost the economy, and student loan rates fell as a result.
"It's great news for anyone borrowing this coming year." said Martha Holler, spokeswoman for Sallie Mae, the nation's largest education lender, which manages more than $92 billion in student loans for some 7 million borrowers.
It's also great news for those who are out of school and want to take advantage of the lower interest rates by consolidating their loans at a fixed rate.
"We should all be so lucky," said David Feitz, deputy executive director for policy and development at Utah Higher Education Assistance Authority (UHEAA), Utah's primary holder of student loans. Borrowers "would be best served by consolidating now."
Interest rates for consolidated loans are calculated according to a weighted average of the loans in the borrower's portfolio, and adjusted up to the nearest 1/8 of a percent. The rate for a someone repaying their loans could be as low as 3.375.
"The very best advice I could possibly give you, is to consolidate while you are in your grace period," said Feitz, where the rate can go as low 2.875. He recommends waiting three of four months into the grace period, which lasts for the first six months out of school, so students can still enjoy that break from payments.
One advantage of consolidation is that students can pay back their loans over a longer period of time, freeing up some monthly income. For someone with $14,000 in debt, which is the average for a Utah student who finished school in four years, the difference would mean paying back $37 less a month, but for five more years.
Holler advises that whether to consolidate should be decided on a case-by-case basis. Longer loan periods mean you pay more in the long run. She also warned that consolidated loans are a "one-way street." Borrowers can only renegotiate them in rare circumstances. Spouses in particular, she said, should be wary of joint consolidation, which cannot be undone in the event of a divorce.
"You need to make sure it's the right decision at the right time," Holler said.
This year could also be the last opportunity to take advantage of a low fixed rate. The Higher Education Act, which sets the terms of the federal student loans, is slated to be reauthorized in Congress this year. Two legislators are proposing an amendment that would change the fixed interest rate option of consolidated loans to a variable rate.
"It's extremely expensive for the government," said Steve Sharp, associate director of the Financial Aid Office at Utah State University. "If interest rates go back up, the federal government pays the difference." he said.
With a tight education budget, many would like to see that money spent in other ways. That's why a number of legislators and organizations, including the National Association of Financial Aid Administrators and College Parents of America, have signed on to the bill.
The lower rates that take effect today are "a terrific deal," said Sharp, "and we encourage students to take advantage of it."
This is not a commitment for a loan or an ad for credit as defined by paragraph 226.24 of regulation Z.