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O.K. Students, Lock in those Loans


The Fed's interest rate cuts may be frustrating homeowners, who haven't seen mortgage rates fall in tandem. But they're about to bring joy to thousands of college students, recent grads, and their parents. Since college loans are tied to shorter-term instruments, the Fed's easing is having more of an impact. In two of the most popular college loan programs, rates are about to plunge to their lowest levels in 20 years.

Savings will be significant for students who borrow under the federal Stafford Loan Program, where the average debt for those finishing grad school is about $23,000 and for undergrads, $10,000. Parents with PLUS loans (Parent Loans for Undergraduate Students) will benefit, too.

The lower rates go into effect automatically for those with variable-rate Stafford and PLUS loans. Those rates rise or fall each July 1 based on the May auction of the 91-Day Treasury bill. The government-set rate for recently issued Staffords plunges from 7.59% (for those still in school) or 8.19% (for graduates making payments) to a low 5.39% or 5.99%, respectively. The drop reduces the monthly payment on a 10-year, $10,000 student loan from $122 to $111, based on the graduate's 5.99% rate. The parent's rate under PLUS plummets from 8.99% to 6.79%. Many will get even lower rates as lenders offer discounts for those who choose the automatic payment option or make timely payments.

In addition, borrowers can lock in current rates by consolidating--essentially refinancing--their loans. In consolidation, assorted variable loans are replaced by one fixed-rate loan, often with a longer repayment schedule.

If these rates aren't incentive enough, the Education Dept. is offering a special discount for those who consolidate through its Direct Loan program by Sept. 30. It will shave another 0.8 percentage points off the rate, giving students the chance to lock in at 4.625%. Subtracting another 0.25% for automatic payments brings that down to 4.375%. "This is very clearly a time of opportunity for students and their families," says Lindsey Kozberg, a department spokesperson.

ONE CHANCE. The only caveat is that those who lock in a loan by consolidating now can't do so again if rates fall still lower, warns Pat Scherschel, an official with Sallie Mae, the largest private holder of Stafford debt. (Lenders like Sallie Mae, of course, would be locked into receiving the lower rate if borrowers consolidate.)

Some private lenders offer discounts to make their variable loans look more attractive. Sallie Mae, for instance, will lop 2 percentage points off the rate after the borrower makes 48 payments on time--although they give the discount by reducing the payback period, not the monthly payments. Citibank, the largest private issuer of Stafford loans, has a similar offer but reduces the payment rather than the time span of the loan.

Borrowers need do nothing if all they want is to keep their fluctuating, variable-rate loans. Rates will be lowered effective July 1, with notices going out in late July or early August.

However, those who want to lock in the new rate must apply for a consolidation loan before rates change again next July. There are no fees for doing this, although parents in the PLUS program will have to pass a credit check.

Borrowers can apply for a government consolidation online at www.loanconsolidation.ed.gov, or by calling 800 557-7392. Citibank borrowers can print an application off its Web site, studentloan.citibank.com, or can call 800 934-1900. Sallie Mae's application can be had at www.salliemae.com, or by calling 800 448-3533. Contact other lenders for their information.

So, don't say the Fed never gave you anything. Graduates having trouble finding a job can at least get lower loan payments. By Carol Marie Cropper


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