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

Student-loan interest rates to decline by nearly 2 percentage points beginning July 1

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

INDIANAPOLIS — Interest rates on federal education loans will fall to historically low levels, effective July 1, 2002, 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.

The repayment rate for borrowers with Stafford loans disbursed since July 1, 1998, will fall to 4.06 percent from the current rate of 5.99 percent. Rates on these loans for borrowers who still are in school, in their six-month, post-school grace period and those who have been authorized to defer payments will drop to 3.46 percent from the current rate of 5.39 percent. Rates on new PLUS loans for parents of undergraduate students will fall to 4.86 percent from the current rate of 6.79 percent.

View a summary of the new Stafford-loan and PLUS-loan interest rates.

A borrower repaying $10,000 in Stafford-loan debt would save more than $1,100 in total interest compared with a borrower repaying the same amount at the current Stafford-loan rate, assuming the new 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:

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 historically low 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.
Student-loan interest deduction. On 2002 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 tax year, subject to income limits and other restrictions. Because of recent tax-law changes, taxpayers will be able to deduct education-loan interest paid during the entire repayment term, and higher-income taxpayers may qualify for at least a partial 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.

"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.