The door is closing on modest interest rates for federally guaranteed student loans.
College students and their parents have less than two weeks to complete their loan applications before July 1, when congressionally mandated rate increases take effect on the most popular education loans.
The variable interest rate on a Stafford loan, which varies now from 4.7 percent to 5.3 percent, will be set at a fixed rate of 6.8 percent for new loans on July 1.
The rate on existing Stafford loans and parent loans for undergraduate students also are to rise by 1.84 points, with Stafford loan rates ranging between 6.54 percent and 7.14. That means July 1 also represents a key deadline for current borrowers who are thinking about consolidating their student loans.
In a big boost for consumers, though, borrowers are now allowed to consolidate their education loans with any qualified lender. Consolidating several education loans can help student borrowers lower their overall financing costs.
Under a provision tucked into a supplemental spending bill, Congress abolished a longtime rule that required borrowers who have all their student loans with one lender to consolidate their loans with that lender. President Bush signed the spending bill Thursday.
The change, which was hailed by college planning advisers, means borrowers can now shop around for the best deal when they consolidate their student loans.
Since the change took effect just last week, “I'm guessing a lot of people have no clue this has happened,” said Deborah Fox, founder of Fox College Funding in San Diego. By consolidating before July 1, a student borrower could save almost $3,000 over the 10-year term of a $25,000 loan, she estimated.
The change brings an end to an unprecedented era of low-interest rates for federal education loans, which are available directly from the U.S. Department of Education and from private lenders.
Part of the reason is that interest rates for student loans were previously tied to 91-day Treasury bills, and interest rates have been climbing. A bigger reason, though, is that Congress decided earlier this year to eliminate variable rates for student loans and to set higher, fixed rates for education loans as part of its deficit reduction act.
The higher rates on student loans accounted for much of the estimated $11.9 billion the government expects to generate in additional revenue over the next five years as part of its bid to trim the $1.6 trillion deficit.
College students and their parents likely will be inundated in coming days with junk mail and solicitations from private education lenders, said Mark Kantrowitz of Finaid.org, which provides online financial aid information for students.
While it's important to compare terms, Kantrowitz said the timing is tight and the clock is ticking.
“Don't let the shopping around prevent you from consolidating,” Kantrowitz said. “The application has to be complete and submitted by midnight on June 30th.”
Over the past year, more than 8 million students and their parents borrowed $58.5 billion in such loans, Kantrowitz said. Of that total, almost 2 million Americans got $13 billion in direct loans from the government.
Fox said some private lenders are offering additional incentives, such as immediate interest rate discounts, to win customers. She added that it might not be worthwhile to consolidate in every case, however.
Private lenders also urge prospective customers to take advantage of the opportunity to lock in loans with lower rates.
Most private lenders will seek to differentiate themselves through superior customer service and other “borrower benefits,” said Mark Brenner, vice chairman of San Diego-based College Loan Corp.
Other lenders said they were already seeing increased volume on their Web sites and student loan call centers.
“We're going to be very busy, exceedingly so,” said Michael Shaut, chief executive of Student Loan Xpress, a San Diego-based lender operated by CIT Group of New York.
Bruce Bigelow: (619) 293-1314; bruce.bigelow@uniontrib.com
