SOURCE: NextStudent

July 14, 2008 09:05 ET

Post-July 1, Borrowers Consolidate Student Loans at Rates as Low as 3.62%

PHOENIX, AZ--(Marketwire - July 14, 2008) - Borrowers will now be able to consolidate their variable-rate federal student loans at significantly lower fixed interest rates, thanks to the Fed's flurry of rate cuts over the last year. Rate cuts made by the Fed largely in response to the subprime mortgage credit crisis added up to a 3-percent drop for student loan borrowers when the interest rate on variable-rate federal college loans reset on July 1, as it does every year.

The interest rate on a federal student loan consolidation is a fixed rate determined by the weighted average of the interest rates on the college loans being consolidated. With July 1 having brought a record-setting rate drop on variable-rate federal parent and student loans, weighted-average consolidated interest rates for these consolidation loans will also be down. Borrowers can take advantage of the current low rates by consolidating their variable-rate college loans and locking in a low fixed consolidated rate.

Borrowers holding variable-rate Stafford student loans that, prior to July 1, were carrying interest rates as high as 8.25 percent may be able to cut their repayment rate to a fixed rate as low as 3.62 percent if they choose to consolidate their student loans this year.

In order to be able to consolidate their federal student loans at the lowest current rates, borrowers must meet certain criteria: They must have taken out variable-rate Stafford loans prior to July 1, 2006; they must not have federal student loans that haven't already been consolidated; and they must consolidate their Stafford loans prior to the end of the six-month grace period they're granted once they leave school.

Those borrowers who have already passed their six-month grace period and are currently in repayment or in forbearance on their Stafford student loans may be able to consolidate at fixed rates as low as 4.25 percent.

Parent borrowers holding unconsolidated variable-rate PLUS loans that were taken out prior to July 1, 2006, will also benefit from the interest-rate reductions that went into effect on July 1. Parents may be able to consolidate their variable-rate federal PLUS loans at a fixed rate as low as 5.125 percent.

In their rush to consolidate their federal student loans and lock in a low interest rate, however, parent and student borrowers may find they have a hard time locating a lender with an active student loan consolidation program. After legislation in 2007 cut over $21 billion in subsidies to private lenders in the federal student loan program, federal consolidation loans became unprofitable to those student loan companies. Most private lenders -- lenders that together account for 83 percent of the education loan volume made last year, according to Mark Kantrowitz, publisher of FinAid.org -- have since suspended their federal student loan consolidation programs.

"Existing consolidation loans, even for banks, are not profitable," Kantrowitz explains. "The joke is, 'Congress took away half the lenders' profit and the credit crisis took away the other half.'"

Kantrowitz recommends that student loan borrowers looking to consolidate their federal parent and student loans at this year's low rates apply directly through the U.S. Department of Education's Direct Loan Program.

About NextStudent

NextStudent, Federal Lender Code 834051, is dedicated to helping students and their families find affordable ways to pay for college. NextStudent offers one-on-one education finance counseling and a portfolio of highly competitive education finance products and services, including a free online scholarship search engine, college loans, and information on parent loans, student loan consolidation programs, and college savings plans.

For more information about NextStudent and its student loan programs, please visit our website at www.NextStudent.com.

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