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May
16, 2002
Borrowers
Should Consider Consolidation to Lock in Historic Low Rate
and Benefits
This
July interest rates on Federal Stafford student loans are
expected to fall to about 4 percent—the lowest rate in
the history of the federal 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.
Over
the past eight years the average student loan debt has nearly
doubled to $16,928 and one-third of all seniors graduate with
more than $20,000 in student loan debt. 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.
New
interest rates could save the typical borrower more than $2,800
over a ten-year pay back period. Borrowers can secure the
new low rate by consolidating their loans after July 1, 2002
and before June 30, 2003.
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 also offers an interest
rate reduction of .25 percent, 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. Consolidating during the in-school
or in-grace period can mean additional savings of up to 0.6
percentage points.
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. The
analysis was based on an average debt of $16,928 over a ten-year
payback period with an estimated 4 percent Stafford loan interest
rate.
Borrowers
interested in consolidating their loans with the lower interest
rate formula should contact their private lender or the direct
loan program. More information about direct loan consolidation
is available by calling the Department of Education at 1-800-557-7392
or visiting the department's Web site at: http://loanconsolidation.ed.gov/.
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