and Answers About the New Loan Interest Rates (effective July
1, 2002) and Loan Consolidation
What are the new interest rates and for which loans do they
The new interest rates are for Stafford Loans and are
set at 4.125% for loans in repayment; and 3.525% for in school
loans. The new PLUS loan rates are 4.875% for both in school
and repayment loans.
How much money will the rate change save borrowers?
This varies from one borrower to another. The typical
borrower with almost $17,000 who pays back their debt over
a ten-year period will save about $2,800 over the life of
When will the new rates become effective?
The new rates go into effect on July 1, 2002, and last
until June 30, 2003.
Why are the rates changing?
According to law each year the Department of Education
resets the student loan interest rate based on the 91-day
Treasury bill (T-bill). The formula for loans in repayment
is 91-day T-bill + 2.3; the formula for in school loans is
91-day T-bill + 1.7.
Who sets the rates?
The Department of Education sets the rates based on a
formula passed into law.
Who is eligible for direct loan consolidation?
Student borrowers, out of school borrowers and parent
borrowers may all be eligible to consolidate their direct
loans. For more specific information about eligibility visit
What are the advantages of direct loan consolidation?
In addition to allowing students to refinance their loans
at better rates, consolidation may deliver other benefits
depending on the borrowers' circumstances. Borrowers can eliminate
the need for dealing with multiple lenders, extend their repayment
period and calculate loan payments based on a percentage of
graduates should consider consolidating during their in-school
or in-grace periods to lock in an even lower interest rate
over the life of their loan. Consolidating during the in-school
or in-grace period can mean a fixed rate of 3.525% over the
life of the loan. Students who consolidate while in-school
are eligible to lock in a 3.525% rate and retain their six
month grace period.
What is the difference between fixed and variable rates?
A fixed interest rate is a rate that stays the same for
the life of the loan. A variable interest rate is a rate that
changes periodically. For example, the interest rate might
be pegged to the cost of US Treasury Bills and be updated
monthly, quarterly, semiannually or annually. If a borrower
consolidates their loans they lock in a fixed rate for the
life of their loan.
How do borrowers make payments on consolidated loans?
Typically repayment begins 60 days after the first disbursement
on the Direct Consolidated Loan. Borrowers will receive a
monthly billing statement from the Direct Loan Servicing Center.
Borrowers can prepay the loan at any time without penalty.
What types of repayment options do borrowers have on Direct
Borrowers can chose from four different repayment options.
The standard repayment plan sets up fixed monthly payments
for a maximum of 10 years. The extended repayment plan sets
up fixed monthly payments ranging from a 12-30 years depending
on the total amount borrowed. These payments are smaller than
in the standard plan because the repayment is drawn out over
a longer period. The graduated repayment plan sets up monthly
payments that increase every two years with the repayment
plan ranging from 12-30 years depending on the total amount
borrowed. The income contingent repayment plan sets up monthly
payments that are based on a borrower's income, family size,
and total loan debt. The payments are spread out over a term
of up to 25 years.
Can borrowers change their payment plans?
Most borrowers can change their repayment plans at any
time. There is no limit the number of times that a borrower
changes plans. However, borrowers who are on the income contingency
plan must make three consecutive monthly payments before switching
to another plan.
Can borrowers consolidate a default loan?
Borrowers can consolidate default loans but must meet
additional requirements to be eligible. Direct loan borrowers
are eligible to consolidate a defaulted loan if they have
at least one direct loan, arrange their repayment under the
Income Contingent Repayment Plan, or have made satisfactory
repayment arrangements on the defaulted loan.
should contact the Department of Education (1-800-557-7392,
for more information.