Federal student loan rates will fall to their lowest levels ever on July 1

Associated Press

The cost of federal student loans is about to fall for most borrowers from already historic lows, the U.S. Education Department said.

On July 1, interest on government-backed student loans known as Stafford loans will automatically fall to 4.06 percent, from 5.99 percent. The rate on PLUS loans will drop to 4.86 percent, from 6.79 percent. Stafford loans are taken out by the student, while PLUS loans are taken out by parents.

The government estimates that if the new rate on the Stafford loans remained unchanged, student borrowers with a $10,000 balance would save $1,133 over the standard 10-year repayment plan.

Last year’s rates were already the lowest since the 7 percent when the student loan program began in 1965.

The new rates are even lower than the rate on the Perkins loans provided to the neediest students, which are fixed at 5 percent rather than adjusted each year. Perkins loans are funded jointly by the federal government and institutions.

Stafford and PLUS loans are made on a variable rate reset each July 1, based on short-term interest rates the government sets after U.S. Treasury bills are auctioned at the end of May. The last auction this month was Tuesday.

The rate drops apply only to Stafford and PLUS loans disbursed on or after July 1, 1998.

Loans obtained before then could also benefit from the lower rates if consolidated. Those thinking of consolidating should examine their options, said Sally Stroup, assistant secretary for postsecondary education. "These rates are for the whole year," she said Wednesday. "They don’t need to race out and do it the first day."

Repayment of Stafford loans begins six months after graduation. PLUS loans are repaid immediately, like credit card debt.

Nearly 8,000 colleges, universities and vocational training schools may take part in the federal loan program. This year, 5.4 million students and parents borrowed an average of $3,945 in federal education loans, a total of $35.6 billion, education officials said.

The rates are this low because of the combined effect of the tragedy of the Sept. 11 attacks and the recession, said John Dean, lobbyist for the Consumer Bankers Association, whose members are the largest commercial banks in student lending.

The rates are unlikely to last — or to compensate much for the steadily climbing cost of a college degree. "People should not fool themselves that somehow college becoming less affordable has been solved," Dean said.