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June
4, 2002
****Student
Loan Interest Rates Plummet to All-time Low:
Student Borrowers Should Consider Consolidation to Lock in
Historic Low Rate and Benefits****
New student
loan interest rates will save the typical borrower about $2,800
over the life of their loan, according to an analysis by the
State PIRGs' Higher Education Project. The new interest rates
on Federal student loans, set to change on July 1, are almost
two percent lower than current rates and are the lowest in
the history of the student loan program.
For many
students this will be an excellent opportunity to consolidate
their loans, lock in a low fixed interest rate, and save thousands
of dollars over the life of their loans. Borrowers can secure
the new rate by consolidating their loans from July 1, 2002,
when the new rates take effect, to June 30, 2003.
Sixty-four
percent (64%) of all students currently borrow to finance
their college education and the average federal student loan
debt has nearly doubled to $16,928 over the past eight years.
As college costs rise and many students and families struggle
to finance a higher education, consolidation offers important
benefits that help to make college more affordable.
Last month
the Bush administration backed a proposal that would have
changed consolidation loan interest rates from fixed to variable,
just as the rates were scheduled to drop to an all-time low.
This proposal would have cost student and parent borrowers
thousands of dollars. Ultimately, the Bush administration
withdrew this anti-consumer proposal, due in large part to
the work of the state PIRGs.
In addition
to allowing borrowers 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, or enroll in payment plans based on a percentage of
their income. The Department of Education, through the Direct
Loan Program, also offers an interest rate reduction of 0.25%
to borrowers who make payments through automatic banking.
Most federal loans can be consolidated either with a private
lender or the Department of Education.
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. Students who consolidate during
their grace period can lock in an interest rate of 3.525%
for the life of their loans, but they will lose their grace
period and need to begin paying back their loans right away.
(Students are eligible to consolidate their loans while in-school
and retain their grace period through the Direct Loan Program).
However, for many students this could mean saving hundreds
of dollars more over the life of their loan, even if they
must begin paying back their debt a few months earlier.
Interest
rates change from year to year, so there is no guarantee that
locking in the new rate will be the best deal. But given that
these will be the lowest rates in the history of the program,
borrowers should consider consolidating their loans after
July 1, 2002 and before the next year's rates are set. PIRG's
analysis was based on an average debt of $16,928 over a ten-year
pay back period with a 4.125% interest rate.
Borrowers
interested in consolidating their loans with the lower interest
rate formula should contact their private lender or the Department's
Direct Loan Program. More information about direct loan consolidation
is available from the Department of Education (1-800-557-7392,
http://loanconsolidation.ed.gov/.)
or at http://www.pirg.org/highered.
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