Lower interest rates may be coming for student loans

NEW YORK - If you've put off consolidating your student loans, youcould be rewarded for your procrastination.

Those with student debt may have been tempted to merge thosevariable-rate loans and lock in a record-low fixed rate. But youcould get an even better deal by waiting, despite what the urgentnotices you may have received from some lenders may suggest.

The rates on federally guaranteed student loans are reset eachJuly 1 and are tied to the 91-day Treasury bill rate from the lastauction in May. Currently, interest rates on federal Stafford loansare 4.06 percent for those who are in repayment, and 3.46 percent forthose in school or within the 6-month "grace period" aftergraduation.

These rates are at the lowest levels in the federal student loanprogram's history, but some experts expect those rates to drop evenlower on July 1.

"I'm projecting that interest rates will go down by an additional50 to 60 basis points," said Mark Kantrowitz, publisher of financialaid and college-planning Web site www.FinAid.org.

Borrowers who wait may be able to lock in rates of less than 3percent. If current Treasury rates remain stable, interest rates onloans could drop to 2.9 percent for those in school or within thegrace period and to 3.5 percent for those in repayment, Kantrowitzsaid.

Short-term interest rates, which are heavily influenced bymonetary policy, are "largely at a bottom," said Brian Nottage, aneconomist at Economy.com who doesn't expect the Federal Reserve tocut rates further. If the economy starts to improve - and if globaluncertainty is lifted - "by the second half of the year, we're likelyto see rising rates," he said.

Meanwhile, interest rates on the 91-day T-bill have ranged between1.2 percent and 1.5 percent since late last year, Nottage said. Hisfirm's May forecast is an average yield of 1.4 percent. The interestrates on federal student loans are calculated by adding 1.7 percentand 2.3 percent to the 91-day T-bill rate - the former number for thein-school rate and the latter for the repayment.

There's no real harm in waiting until spring to see where interestrates stand. You still get the benefit of the current low interestrates on your loans until July 1, 2003. If rates haven't moved lowerby May, or if they've started moving higher, you have time toconsolidate before the new rates take effect.

Just make sure to submit your application at least four to sixweeks before the July 1 rate change to allow for processing time.

Another reason not to wait too long: President Bush last yearsigned legislation that would change the variable interest rates to afixed rate of 6.8 percent on Stafford loans and to 7.9 percent forParent Loans for Undergraduate Students, or Plus loans, effectiveJuly 1, 2006, Kantrowitz said.

Keep in mind that you only have one chance to consolidate yourloans. Once you do, you're locked into that rate for the life of theloan.

The only reason it may make sense to consolidate now is if your"grace period" is scheduled to end before the July 1 rate change.That way, you could lock in the in-school rate, which is 0.6 percentlower than the repayment rate. One option: Wait until spring to seewhat interest rates look like. If they look like they're going todrop by more than 60 basis points, then it might make sense for youto consolidate after July 1, even at the higher repayment rate.

A couple of other tips:

* Only federal loans - including Stafford, Perkins and Plus loans -can be consolidated. You can't consolidate private loans fromcolleges or other sources.

* Many lenders will offer additional discounts if you're willingto make your payments electronically, or if you've paid on time.

* If you choose to consolidate your loans, you will stretch outthe terms of the loan beyond the 10-year repayment plan that istypical for federal loans. Your monthly payments will be lower, butyou will increase the total amount of interest paid over the life ofthe loan. If you can afford it, pay more than your monthly paymenteach month since there are no prepayment penalties with federalloans.