College Loan Rates to Hit New Lows

The cost of federal student loans is about to fall for most borrowers from already historic lows, the Education Department said Wednesday.

On July 1, the annualized interest rate on government-backed student loans will automatically fall to 4.06% from 5.99%. Parents borrowing to finance their children’s schooling will see their rate drop to 4.86% from 6.79%.

Last year’s rates were the lowest since the student loan program began in 1965 with a rate of 7%.

Loans are issued at a variable rate that resets each July 1, based on short-term Treasury security interest rates at the end of May.

The interest rate drops apply to so-called Stafford loans for students and PLUS loans for parents that were disbursed on or after July 1, 1998.

Loans obtained before then also could benefit from the lower rates if consolidated. But borrowers thinking of consolidating should examine their options, said Sally Stroup, assistant secretary for post-secondary education.

“These rates are for the whole year. They don’t need to race out and do it the first day,” she said.

New borrowers also should be aware that, because loan rates are revised annually, future loan costs could rise sharply if market interest rates increase with a stronger economy. However, by law Stafford loan rates can’t rise above 8.25%.

Repayment of Stafford loans begins six months after graduation. PLUS loans are repaid immediately, like credit card debt.

Nearly 8,000 colleges, universities and vocational schools may take part in the U.S. loan program.