Lower rates benefit students

When the Federal Reserve slashed interest rates to a 41-year low last week, IU students deep in federal debt got a dose of relief.\nIf the rates stay low until summer, the U.S. Department of Education may cut the already all-time-low rates of federal loans, including Direct Federal Stafford and PLUS loans. \nThe possible rate reduction may mean a lot for IU students in Bloomington, 35 percent (about 16,000) of whom borrowed a combined $137.8 million from Uncle Sam last year, according to the Budget Office.\nSince 1990, the average federal debt held by IU seniors has jumped 143 percent to $18,514 from $7,620, according to the Office of Student Financial Assistance's Web site. In the same period, average debt among grad students has ballooned 232 percent to $44,267 from $13,323.\nConsolidation\nWithout any further reductions, Stafford and PLUS loans have the lowest rate in history, so students should think about loan consolidations, financial advisers say. For no charge, the Federal Consolidation Loan program allows students to package their federal loans into one big loan and permanently lock in the fixed rates.\n"If you are getting ready to finish your program -- undergraduate, graduate, whichever -- you should be looking into consolidations and their options," said Charles Ranard, associate director for the IU Office of Student Financial Assistance.\nThe Stafford loan interest rate, the base used to set the fixed rates in consolidations, stands at 3.46 percent a year for students enrolled in school and 4.06 percent for repaying graduates.\n"Rates used to be close to 8 percent a few years ago, and now rates are around 4 percent," Ranard said. "That's a huge benefit." The federal government puts an 8.25 percent interest-rate cap on Stafford loans.\nStafford loans are the biggest source of student loans in the nation as well as at IU. In 2001, Bloomington students borrowed $55.7 million in unsubsidized Stafford loans alone, according to the financial assistance office's data.\nIn the same year, helped by their parents, students borrowed $22.6 million in the federal PLUS loans, which now have 4.85 percent interest for both enrolled and graduated students.\nUnconsolidated, the loans' rates will rise or slide every summer along with the market. On July 1, the U.S. Department of Education changes the federal loans' rates according to the 91-day Treasury bills auctioned back in May. Treasury bill rates are determined by the short-term rates.\nThe federal government lets consolidators stretch their repayment periods to 30 years to reduce monthly payments. They can also choose from four repayment plans designed to ease repaying. \nAn average 4.4 percent of the IU graduates just entering repayments defaulted each year between 1992 and 2000. They, too, may be allowed to consolidate their defaulted loans if they meet federal requirements. \nStudents may wonder whether they should wait until spring's treasury bill auction, as they may see even lower loan rates in July.\n"It's a hard decision to make, and someone like me cannot tell students whether they should consolidate or not," Ranard said. Financial advisers cannot take responsibility if the Fed suddenly raises interest rates before July.\n"Those students are financially responsible for their own loans," Ranard said. "Nobody else can take that responsibility."\nEconomists generally agree the Federal Reserve won't slash rates again, as the central bankers want ammunition left in case the economy drifts from bad to worse, said Bill Witte, an economics professor. At the same time, most economists don't believe the recent rate cut will kick inflation skyward, given the high U.S. productivity keeping prices down.\nStudents can consolidate private-sector debts if they have Federal Family Education loans, Ranard added. In the FFEL program, private lenders, such as Citibank or Bank One, lend students at federal loans' rates, with the government insuring repayments.\nConsolidating federal direct loans through FFEL lenders is possible, and so is consolidation of FFEL loans through the U.S. government, Ranard said. \n"But there are subtle differences," he said, as FFEL lenders and the government offer some different benefits. "You should investigate both. Research them. Find out the benefits."\nStudents should know that everyone might not gain from consolidations, especially those with Federal Perkins loans, Ranard said. Between 1995 and 2001, Perkins loans borrowed by students in Bloomington increased 65 percent to $5.8 million from $3.5 million, according to the budget office.\nThe Perkins loan comes with special cancellation provisions, said Barbara Bright, director of the IU Student Loan Administration. Perkins debtors can have the government void part or all of their outstanding loans if they teach at specific elementary or secondary schools, work at medical institutions or serve the U.S. military after graduation.\nStudents may consolidate their Stafford and Perkins loans and gain average rates lower than 5 percent, which is the Perkins loan's fixed rate. But the consolidated loans will lose deferment or cancellation rights.\n"That's something students really need to be aware of," Bright said.