Federal Student Loan Interest Rates To Reach Record Low

By CityTownInfo.com Staff
June 5, 2009

Students who wait until July 1 this year to consolidate their variable-rate federal student loans will benefit from the lowest fixed interest rates in the history of the federal loan system.

Mark Kantrowitz, the financial aid expert who founded FinAid.org, and FastWeb.com, writes that beginning July 1, the interest rate for a consolidated Stafford loan while a student is still in school will be 2 percent, and during the repayment period it will be 2.5 percent. The interest rate for consolidating PLUS loans will be 3.38 percent.

"Borrowers who wait until July 1, 2009 to consolidate will save big over the life of the loan," he notes.

A $20,000 Stafford loan with a standard 10-year repayment plan at 6.8 percent would typically cost $230 monthly and nearly $8,000 in interest over the life of the loan. The new 2 percent rate would allow students to pay $184 a month for the same loan, with just over $2,000 in interest over the life of the loan--a whopping 73 percent savings in interest.

Kantrowitz said that consolidating loans can cut back on paperwork by combining all loans into one, he told Rochester, New York's Democrat and Chronicle. Additionally, consolidation can make it easier to borrowers to take advantage of different repayment options, including the new Income-Based Repayment program, which allows smaller monthly payments based on the amount of one's loans, income and family size.

Kantrowitz added that consolidation also lets some borrowers to take advantage of public service loan forgiveness, which allows workers to have their loans forgiven after 10 years of employment in public service. He noted that the government's definition of "public service" includes anything from teaching to working for a nonprofit.

There are some caveats: Borrowers who already consolidated their loans cannot take advantage of the new interest rate, and loans originated after July 1, 2006 are also not eligible. The federal consolidated loan cannot include private loans, and students still in school cannot consolidate loans until after they graduate.

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