Effective July 1, 2004, interest rates on Federal Stafford loans issued since July 1, 1998, fall to their lowest levels in the history of the federal student-loan program. The coming academic year will mark the fourth consecutive year during which education-loan rates have declined. Consider the following advice to your borrowers about how they can benefit from the new rates.

- The repayment rate on new Stafford loans drops to 3.37 percent. The rate for borrowers who are still in school; in the six-month, post-school grace period; or who have been authorized to defer their loan payments falls to 2.77 percent.

- Interest rates on new Federal PLUS loans for parents of undergraduate students drop to 4.17 percent.

- Student-loan and parent-loan borrowers automatically receive the new rates, which are effective through June 30, 2005.

Because the interest-rate formula depends on the academic year in which the loans were issued, borrowers with older Stafford and PLUS loans will receive different rates than borrowers with newer loans. Students and parents can take advantage of the lower rates.

Current students - if they’ve taken out Stafford loans since July 1995, they'll receive the lowest rate possible. Stafford rates for borrowers who are in school or in the six-month grace period after leaving school, or who have been authorized to defer loan payments, are 0.6 percentage points lower than rates for former students repaying their loans.

Former students and parents - because student-loan interest rates are at historic lows, they may consider locking in those rates with a Federal Consolidation loan. Unlike rates on Stafford and PLUS loans, which are adjusted annually, rates on Federal Consolidation loans are fixed for the life of the loan. Loan consolidation also allows borrowers to bundle multiple loans into a single monthly payment. Hint: If the borrower is in the post-school grace period and consolidate Stafford loans issued since July 1995, they'll lock in a lower rate than if they wait to enter repayment before consolidating their education debt.

Notes of caution about loan consolidation - the rate received on Federal Consolidation loans will be the weighted average of the consolidated loans, rounded up to the nearest one-eighth of 1 percent, so borrowers can expect a slightly higher rate than the average of the loans included in the consolidation. Thus, if they have one year or less remaining in their repayment term, they may not benefit from loan consolidation. In most cases, they can consolidate their student loans only once. If student-loan rates fall again next year, and they've consolidated their loans, they will be stuck with a higher rate.

If a borrower has $7,500 or more in outstanding education debt, they can use loan consolidation to extend the repayment period and thereby lower the monthly payment amount. Be aware that extending repayment over a longer term increases the total interest costs, possibly negating any interest savings realized from locking in the lower interest rate.

For more information about a Federal Consolidation loan, contact the organization that holds or services your loan. If you don’t know who holds or services your loan, use the free LoanLocator service of the National Student Clearinghouse, at www.loanlocator.org.

Submitted by: Gene Logan, USA Funds Services