Student loans become more affordable

Paying for college has always been tricky, but rising tuition costs and declining financial aid have made it even more difficult in recent years. However, starting July 1, paying for college is going to get (a little) easier. Thanks to a $20 billion college aid package passed by Congress in 2007, the fixed interest rate on new federally-guaranteed Stafford Loans is set to drop to 5.6% from the current level of 6.0%. Next year, the rate will decline even further to 4.5% and the following year it will fall to 3.4%.

The news is even better for those with student loans that were originated before 2006. Prior to 2006, Stafford loans were always variable rate. Loans in the grace period (i.e., in the six month period between graduation and the start of repayment), bear a rate equal to the rate on the 91-day Treasury Bill + 1.7%. Loans in repayment bear a rate set at T-Bills + 2.3%.  The historically low T-Bill rates means that interest rates on these loans will drop to 2.48% from 4.21% on July 1.

One of the most attractive aspects of these pre-2006 loans is that they can be consolidated to lock in the current low interest rates for the life of the loan. According to the rules of consolidation, the fixed interest rate on a consolidation loan is equal to the weighted average of the loans being consolidated rounded up to the nearest 1/8. This means that if you consolidate your pre-2006 Stafford loans after July 1 (remember, they will have a 2.48% rate), you can lock in a 2.5% interest rate for the life of the consolidation loan. Depending on the amount of debt being consolidated, the term of the consolidation loans could last 10 to 30 years.

If you want more information on financing college education or consolidating student loans you can read more at FinAid.org. It is an excellent site with practical tips for students and parents. The federal government has also put together a helpful website on financial aid.