Effective July 1, 2004, interest rates on Federal Stafford loans issued since July 1, 1998, fell to their lowest levels in the history of the federal student-loan program. The coming academic year will mark the fourth consecutive year during which education-loan rates have declined. Consider the following advice to your borrowers about how they can benefit from the new rates.

The repayment rate on new Stafford loans drops to 3.37 percent. The rate for borrowers who are still in school; in the six-month, post-school grace period; or have been authorized to defer their loan payments falls to 2.77 percent.

Interest rates on new Federal PLUS loans for parents of undergraduate students drop to 4.17 percent.

Student-loan and parent-loan borrowers automatically receive the new rates, which are effective through June 30, 2005.

Because the interest-rate formula depends on the academic year in which the loans were issued, borrowers with older Stafford and PLUS loans will receive different rates than borrowers with newer loans. An interest-rates summary table and other “Interest-Rate Information” is available from the “Loan Policy and Regulations” page in the “Financial-Aid Professionals” section of USA Funds’ Web site, www.usafunds.org.

Students and parents can take advantage of the lower rates

• Current students. If you’ve taken out Stafford loans since July 1995, you’ll receive the lowest rate possible. Stafford rates for borrowers who are in school or in the six-month grace period after leaving school, or who have been authorized to defer loan payments, are 0.6 percentage points lower than rates for former students repaying their loans. Enjoy the lower rates, but don't borrow more than you need to pay education expenses — rates could rise or fall next year, and you must still repay your student-loan debt, plus any interest.
• Former students and parents. Because student-loan interest rates are at historic lows, you may consider locking in those rates with a Federal Consolidation loan. Unlike rates on Stafford and PLUS loans, which are adjusted annually, rates on Federal Consolidation loans are fixed for the life of the loan. Loan consolidation also allows you to bundle multiple loans into a single monthly payment. Hint: If you are in the post-school grace period and consolidate Stafford loans issued since July 1995, you’ll lock in a lower rate than if you wait to enter repayment before consolidating your education debt.

Notes of caution about loan consolidation

• The rate you will receive on your Federal Consolidation loan will be the weighted average of the consolidated loans, rounded up to the nearest one-eighth of 1 percent, so you can expect a slightly higher rate than the average of the loans included in the consolidation. Thus, if you have one year or less remaining in your repayment term, you may not benefit from loan consolidation.
• In most cases, you can consolidate your student loans only once. If student-loan rates fall again next year, and you’ve consolidated your loans, you will be stuck with a higher rate.
• If you have $7,500 or more in outstanding education debt, you can use loan consolidation to extend the repayment period and thereby lower your monthly payment amount. Be aware that extending repayment over a longer term increases the total interest costs, possibly negating any interest savings you would realize from locking in the lower interest rate.
  For more information about a Federal Consolidation loan, contact the organization that holds or services your loan. If you don’t know who holds or services your loan, use the free LoanLocator service of the National Student Clearinghouse, at www.loanlocator.org.