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

Ivan Frishberg

Ellynne Bannon


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, or at