Home » Financial Aid » Loan Information » Current Loan Rates and Information on Loan Consolidation

Current Loan Rates and Information on Loan Consolidation

Variable rate loans (which were originated prior to July 1, 2006) reset their interest rates every July 1 based on the last 91-day T-Bill auction in May. This year, that was the May 29, 2007 auction.

Based on this, the interest rates will be as follows starting on July 1, 2007:

• Stafford (in-school/grace): 6.62%
• Stafford (repayment): 7.22%
• PLUS: 8.02%

These rates represent an increase of 0.08%.

Rates on fixed rate loans (which were originated on or after July 1, 2006) are not changing and remain at 6.8% Stafford, 7.9% DL PLUS, 8.5% FFEL PLUS.

The interest rates on consolidation loans are the weighted average of the rates on the loans being consolidated, rounded up to the nearest 1/8th of a point, and capped at 8.25%. The consolidation rate is a fixed rate.

So with regard to consolidation of variable rate loans, the equivalent consolidation rates are not changing by much. The in-school/grace period rate on a Stafford loan consolidates to 6.625% before and after July 1. Likewise, the repayment rate consolidates to 7.25%. The only change is with the PLUS loan, which consolidates to 8.0% before July 1 and 8.125% afterward.

So the main consideration this year is not the July 1 change in the interest rates, but rather the end of the grace period. Since one can no longer consolidate during the in-school period, the only option for locking in the lower in-school rate is to consolidate during the six month grace period.

So there is less urgency with regard to the July 1 deadline and many lenders will hold the consolidation application to maximize the length of the grace period.

However, keep in mind that the weighted average may shift with regard to a 1/8th of a point boundary depending on whether one includes fixed rate loans in the consolidation, and what the loan balances are. It may be advisable for borrowers to consolidate variable rate loans separately if they have a lot of fixed rate loans, in order to minimize the amount of roundup.

Borrowers with just fixed rate loans (including previous consolidation loans that locked in historically low rates) do not need to do anything special, since their loans are already fixed. But they should be aware that any previously consolidated loans do not have a grace period, so repayment on those loans will begin within 60 days of graduation.

To put things in perspective, a 1/8th of a point increase in the PLUS loan interest rate on $20,000 in debt represents an increase of $1.32 in the monthly payment on a 10 year loan and $1.56 in the monthly payment on a 20 year loan. So any change with regard to July 1 is negligible, a few hundred dollars savings in interest over the life of the loan. But the change with regard to the end of the grace period (whether one locks in the in-school or repayment rates) is more significant. The difference between 6.625% and 7.25% is $772.37 in interest over the lifetime of a 10 year loan ($6.44 difference in the monthly payment), and $1,794.98 in interest over the lifetime of a 20 year loan ($7.48 difference in the monthly payment).

Aside from the potential cost savings from locking in the in-school rate on variable rate loans, borrowers are consolidating mainly to get a single monthly payment and to reduce the size of the monthly payment by increasing the loan term. Borrowers should be aware that increasing the loan term substantially increases the interest paid over the lifetime of the loan. For example, going from a 10 year term to a 20 year term reduces the monthly payment by about a third, but more than doubles the interest paid over the lifetime of the loan. Borrowers who consolidate can choose to remain with standard ten year repayment.

Additional reasons to and not to consolidate can be found at http://www.finaid.org/loans/whyconsolidate.phtml.