Student loan rates will hit record low

SAN FRANCISCO -- Despite the specter of rising interest rates, student-loan borrowers will soon enjoy the lowest rates in 39 years for the year beginning July 1.\nThe variable rate on federal Stafford loans, the most common, drops to 2.77 percent from 2.82 percent for current students and new graduates, according to Sallie Mae, the student-loan lender. Graduates will pay 3.37 percent, down from 3.42 percent, and parents with PLUS loans will pay 4.17 percent, versus 4.22 percent.\n"Interest is accruing at a very slow pace compared to prior years when the rates were as high as 8.25 percent," said Patricia Scherschel, consolidation product executive at Sallie Mae.\nStudent loan rates are reset each year July 1. They're tied to investment yields on short-term Treasury bills based on May's final auction, plus an additional formula.\nSome borrowers planning to consolidate existing variable-rate loans into a single fixed-rate one would best wait until after July 1. The education department allows those with a single, variable-rate loan or a mix of fixed and variable loans accumulated over the years to refinance into one fixed-rate loan with often longer repayment schedules.\nThe consolidation rate for Stafford borrowers already in repayment will be 3.375 percent starting July 1, down from 3.5 percent, according to Sallie Mae.\nBut for Stafford borrowers in a grace period or those in deferment, the consolidated rate is unchanged for the coming year -- 2.875 percent.\nThat's because the process of calculating the fixed rate, in which a weighted average of rates is adjusted upward to the nearest one-eighth of a percent, can smooth out minor changes in loan rates.\nParents with PLUS loans would also find their consolidated fixed rate unchanged for the year, at 4.25 percent.\nUntil now, it's made sense to time a loan consolidation -- If you think rates are going to fall July 1, you wait.\nThat may change in coming years. Some in Congress are suggesting replacing consolidated loans' fixed-rate perk with variable rates, because the government's subsidy of such loans -- it pays lenders the difference between borrowers' fixed rates and prevailing commercial-paper rates -- would be better spent elsewhere.\n"They want to move taxpayer dollars to programs that help get low- and middle-income students to and through school as opposed to continuing financial aid after they've left school," said Martha Holler, a Sallie Mae spokeswoman. \nSallie Mae supports the move to a variable-rate program.\n"There's no means test for loan consolidation," she said. Plus, it will make loan consolidation "a more equitable program. Just three years ago, people who were consolidating were consolidating at the cap of 8.25 percent."\nLoan rates aren't necessarily going down for everyone. Parents holding older PLUS loans may well see their rates rise.\n"If you're a parent with PLUS loans issued before July 1, 1998, most likely the rates are going to rise substantially ... a quarter- to a half-percentage point based on the data I saw," Scherschel said.\nThat's because those loan rates are tied to a different index, which will be set at the end of June. Scherschel recommends borrowers call their primary lenders to assess whether consolidating those loans now -- before the rate hike -- may make sense.