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

Ivan Frishberg

Ellynne Bannon


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: