Lower rates...cut cost of borrowing
Submitted by Larry Viterna, USA Funds Services
Interest rates on federal education loans have fallen to historically low levels, effective July 1, 2002, providing student- and parent-borrowers another means to reduce the cost of attending college on credit.
The repayment rate for borrowers with Stafford loans disbursed since July 1, 1998, fell to 4.06 percent from 5.99 percent. Rates on these loans for borrowers who still are in school, those who are in their six-month, post-school grace period and those who have been authorized to defer payments dropped to 3.46 percent from 5.39 percent. Rates on new PLUS loans for parents of undergraduate students fell to 4.86 percent from 6.79 percent.
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 previous year's Stafford-loan rate, assuming the new rates remain constant over the 10-year payback period.
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 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. 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.
A table summarizing the 2002-2003 interest rates is available at