Lower Rates Provide Another Means to Cut Costs of Borrowing for College

Student-loan interest rates to decline by as much as 2.2 percentage points beginning July 1

Lower Rates Provide Another Means to Cut Costs of Borrowing for College

INDIANAPOLIS—Interest rates on federal education loans will fall to historically low levels, effective July 1, 2001, providing student- and parent-borrowers another means to reduce the cost of attending college on credit, according to USA Funds^®, the nation's largest education-loan guarantor.

Rates on new Federal Stafford loans for students will fall to the lowest level in the 35-year history of the federal student-loan program. The repayment rate for borrowers with Stafford loans disbursed since July 1, 1998, will fall 2.2 percentage points to 5.99 percent. Rates on new PLUS loans for parents of undergraduate students also will fall by 2.2 percentage points, to 6.79 percent, effective July 1.

A borrower repaying $10,000 in Stafford-loan debt would save more than $1,300 in total interest compared with a borrower repaying the same amount at the current Stafford-loan rate, assuming rates remain constant over the 10-year payback period.

"Borrowers automatically receive the new rates without having to take any action," said Carl C. Dalstrom, USA Funds president and CEO. "Students, graduates and their parents should be aware of several other means to further reduce the cost of repaying their student loans."

These additional student-loan cost-cutting opportunities include the following items:

Student-loan interest deduction. On 2001 federal income-tax returns to be filed next year, taxpayers may deduct up to $2,500 of the education-loan interest that they paid during the first 60 months that interest payments were required, subject to income limits. The federal tax-relief package that President Bush recently signed into law will enhance this student-loan interest deduction beginning with the 2002 tax year, when taxpayers will be able to deduct education-loan interest paid during the entire repayment term, and higher-income taxpayers will qualify for at least a partial deduction. Taxpayers do not have to itemize deductions to claim the student-loan interest deduction; however, they must file Form 1040 or Form 1040A, and married taxpayers must file jointly to claim the deduction.
Lower fees and other borrower benefits. USA Funds waives the 1-percent guarantee fee normally charged borrowers of Federal Stafford and PLUS loans. In addition, many education lenders offer borrower benefits that reduce interest costs for borrowers who allow automatic deduction of their loan payments from their bank accounts and who have a history of timely loan payments.
Federal interest subsidy. Students who demonstrate economic need may qualify for subsidized Stafford loans. The federal government pays the interest that accrues on these loans while the borrower attends school, for six months after the borrower leaves school, and during periods when the borrower is authorized to defer loan payments. For an undergraduate student who borrows a total of $10,000 over four years of college, this subsidy could produce interest savings of more than $2,000. To determine their eligibility for subsidized Stafford loans and for many other forms of financial aid, students must complete and file the Free Application for Federal Student Aid (FAFSA) by the date recommended by their school.
Loan consolidation. Because Federal Consolidation loans offer fixed interest rates for the life of the loan, borrowers who consolidate their loans after July 1 will lock in the historically lower rates. Borrowers should be aware that they will forgo any future interest-rate declines on variable-rate Stafford and PLUS loans that they include in a consolidation loan. Because consolidation-loan rates are rounded up to the nearest one-eighth of 1 percent, borrowers also should be aware that the rate on their consolidation loan is likely to be slightly higher than the average rates of the loans they are consolidating. Borrowers with $7,500 or more in education debt may extend their repayment term through loan consolidation; however, the additional interest paid over a longer payback period could easily offset any interest savings gained from the lower interest rate. Borrowers who are considering consolidating their student loans should contact their current loan holder or the organization that services their loans.

"Students and parents who take advantage of these interest-saving options can reduce the effective interest rates on their education debt below even these historically low rates," Dalstrom said.

Headquartered in Indianapolis, USA Funds annually guarantees $9 billion in education loans in all 50 states and serves as the designated guarantor for nine states: Alaska, Arizona, Hawaii and the Pacific Islands, Indiana, Kansas, Maryland, Mississippi, Nevada and Wyoming.