College loan rates likely to drop July 1
By Sandra Block
USA Today
Parents and students who borrow to pay for college could get a big break this summer, when interest rates are expected to fall to about 4 percent for most student loans.
Interest rates on federal Stafford loans are recalculated annually on July 1, based on a formula tied to interest rates for short-term Treasury bills. Unless those rates jump during the next few weeks, rates for student loans will fall to record lows, student loan experts say.
Who stands to gain:
• Grads repaying federal loans.
If the benchmark rate for three 3-month Treasury bills remains unchanged at the May auction, interest on federal Stafford loans disbursed after July 1, 1998, will fall to 4.02 percent from 5.99 percent, says Robert Murray at USA Funds, which guarantees student loans. Rates will fall by a little less for loans issued before 1998.
• Grads who consolidate.
Student-loan interest is adjusted annually, so rates could increase in July 2003. But borrowers who consolidate can lock in current rates for the life of the loan.
Many students with loans issued after 1998 could lock in a 4.13 percent rate this summer. Loan experts recommend that borrowers postpone consolidating until after July 1. On a $20,000 loan repaid over 20 years, locking in the lower rate could result in a savings of nearly $5,000.
• Parents with college loans.
The Parent Loan for Undergraduate Students, which lets parents borrow for their children's college education, is also tied to short-term Treasury bill rates. If rates remain unchanged at the May auction, the rate for these loans will decline to 4.82 percent from 6.79 percent.
• Borrowers still in school.
Student borrowers can defer repaying their loans while they're in school. But unless they qualify for federally subsidized Stafford loans, which are based on economic need, interest on those loans accrues during the deferment period. Accrual rates, which are lower than repayment rates, are also tied to Treasury bill rates.
If rates remain unchanged, the accrual rate could fall to as low as 3.5 percent, says Patricia Scherschel, marketing executive for Sallie Mae, which finances student loans. That means students will have a smaller balance when they start repaying their loans.
A significant increase in short-term interest rates by the May 28 Treasury auction appears unlikely.
In testimony before Congress last week, Federal Reserve Board Chairman Alan Greenspan indicated he is in no hurry to raise interest rates because the economic rebound could still falter. The Fed typically raises interest rates to ward off inflation, which appears under control.
The expected decline in interest rates comes at a time when students are leaving college with record levels of debt. The average debt among student borrowers has nearly doubled in the past decade to $16,928, according to a recent analysis by the Public Interest Research Group.
