Students rush to lock loan rates

Students are rushing to lock in favorable interest rates on their college loans before a nearly 2.0 percentage point rise July 1.

The rate rise affects college undergraduates who hold federal "Stafford" loans, the most affordable type of student loan, as well as college graduates who still carry debt they racked up in college, and parents who took out "Parent PLUS" loans.

Interest rates on existing Stafford and PLUS loans readjust annually on July 1 at a premium over the 91-day Treasury bill rate, which has risen nearly 2.0 percentage points over the past year thanks to the Federal Reserve's current monetary policy tightening cycle.

Variable-rate federal loans will no longer be available after July 1, when the new law comes into effect. Instead, new loans will carry fixed interest rates of 6.8 percent for Stafford loans and 8.5 percent for PLUS loans.

"Driving the fixed-rate decision was the fact that rates did drop so dramatically (in recent years)," said Joe Cronin, President and CEO of StaffordLoan.com. The Stafford loan rate bottomed out at 2.77 percent for the 2004-2005 school year.

"The government in some cases had to subsidize the lenders when the rates dropped below certain minimums," he said. "It got really expensive to maintain."

Of the 19 million U.S. undergraduates, about 33 percent received some type of federal assistance in the 2003-2004 school year, up from 19.1 percent who had federal loans in 1992-1993, according to the National Center for Education Statistics.

One reason for the jump in federal assistance may be the soaring price tag of a college education. The average cost of tuition, room and board at four-year public and private schools has more than doubled since 1990, according a study released this week by the U.S. Census Bureau. The average student now graduates with about $19,000 in federal student loan debt.

"Average loan balances have increased significantly over the past five years," said Mark Kantrowitz, publisher of FinAid.org. He attributed that increase to the historically low U.S. interest rates, which made variable Stafford loans the most affordable type of federal loan.

"Prior to September 11, the interest rate on student loans had never been below 6 percent," he said. "Now we're back around the historical average and I don't expect us to ever get that low again."

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Kantrowitz and many others have seen students flock to their Web sites recently in an effort to assess the impact of the July 1 rate hikes.

"Traffic is up 200-300 percent from a month ago and it's gone up 10 to 20 percent each day over the last week," said Joe Cronin. "There are some tired people here."

"The rate change is really going to affect for the most part people who are out of school," he said, since those students who consolidated their loans after graduating are not eligible to consolidate again.

"Stafford loans are done per semester," explained Kevin Brandt, a software engineer who carries around $15,500 in loans seven years after graduating from college. "They're a bunch of little loans and you wrap them up when you graduate."

Because Brandt consolidated his loans upon graduation, he cannot take advantage of locking in lower interest rates before they rise on July 1.

"If you've already consolidated you're stuck," he said. "You're pretty much at the mercy of the Federal Reserve."