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

Ivan Frishberg

Ellynne Bannon


To: Student Aid Activists
Fr: Ellynne Bannon, State PIRGs' Higher Education Project
September 18, 2001

****Borrowers Should Consider Consolidation to Lock in the New Low Rate and Benefits****

New interest rates and benefits could save the typical borrower more than $2,200 over the life of their student loan. The new interest rates on Federal higher education loans are 2.2% lower than last year and are the lowest in years. Borrowers can secure the new rate by consolidating their loans after July 1, 2001 and before June 30, 2002.

On-time repayment incentive to expire on September 30th

Borrowers who consolidate eligible student loans into the Federal Direct Consolidation Loan Program before September 30, 2001 will receive an immediate interest rate reduction of .8%. To keep this benefit beyond the initial 12-month period, a borrower must make the first twelve monthly payments on time. The .8% rate reduction will become permanent once these first twelve payments are made on time
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 and calculate loan payments based on a percentage of income. The Department will also offers an interest rate reduction, of .25%, to borrowers who make payments through automatic bank. Most federal loans can be consolidated either with a private lender or the Department of Education.

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 are the lowest rates in years, borrowers should consider consolidating their loans after July 1, 2001 and before the next year's rates are set. The analysis was based on an average debt of $13,300 over a ten-year payback period. According to the current formula the new interest rates for Stafford loans will be 6.0%.

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 website at: