State PIRGs' Higher Education Project
218 D Street SE
Washington, DC 20003
(202) 546-9707

Ivan Frishberg

Ellynne Bannon


Questions and Answers About the New Loan Interest Rates (effective July 1, 2002) and Loan Consolidation

Q. What are the new interest rates and for which loans do they apply?

A. 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.

Q. How much money will the rate change save borrowers?

A. 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 their loan.

Q. When will the new rates become effective?

A. The new rates go into effect on July 1, 2002, and last until June 30, 2003.

Q. Why are the rates changing?

A. 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.

Q. Who sets the rates?

A. The Department of Education sets the rates based on a formula passed into law.

Q. Who is eligible for direct loan consolidation?

A. 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

Q. What are the advantages of direct loan consolidation?

A. 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 income.

Recent 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.

Q. What is the difference between fixed and variable rates?

A. 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.

Q. How do borrowers make payments on consolidated loans?

A. 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.

Q. What types of repayment options do borrowers have on Direct Consolidation Loans?

A. 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.

Q. Can borrowers change their payment plans?

A. 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.

Q. Can borrowers consolidate a default loan?

A. 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.

Borrowers should contact the Department of Education (1-800-557-7392, for more information.