Student Loan Rates to Rise July 1

Student loan rates will rocket in July as a result of Tuesday’s Treasury bill auction.

The interest rate on so-called Stafford loans -- the most common type of student loan -- is expected to shoot up to 7.14% on July 1 from the current 5.3%.

As a result, financial experts are urging students to consolidate their variable-rate student loans into fixed-rate loans before the higher interest rates take effect.

“Everybody should consolidate. This is a good deal that should not be missed,” said Kevin Walker, co-founder and chief executive of Consolidation-Comparison.com, a website that aims to help students find the best deal on federally guaranteed consolidation loans.

Stafford loans are variable-rate debt that float based on the 91-day Treasury bill rate. The rates are changed once annually -- on July 1 -- based on adding a “margin” to the T-bill rate set at the last auction in May.

At that auction, held Tuesday afternoon, the 91-day T-bill yield was 4.84%, up 1.84 percentage points from a year earlier. (The yield is slightly different from the so-called discount rate, which was 4.72% on Tuesday.)

Stafford loans in “deferment” -- those that don’t yet need to be repaid because the student is in school or in a postgraduate grace period -- accrue interest at a somewhat lower rate. That rate will rise to 6.54%. The cost of parent loans for students, better known as PLUS loans, will jump to 7.94%.

For a student with $20,000 in debt, the change could cost $5,123 over the life of the loan, said Patricia Scherschel, vice president of loan consolidation at Sallie Mae, a Reston, Va.-based student lender.

There is one way to sidestep the rate hike, however. It’s called consolidation. What loan consolidation does is turn a variable-rate loan into a fixed-rate loan under the federal student loan program.

Experts are nearly unanimous in recommending it now to students with a loan outstanding -- whether they’re in school or have graduated.

But there’s no time to lose. Under federal rules, the fixed rate on consolidation loans is set at the weighted average market rate, rounded up to the next one-eighth of a percentage point. Today, that rate would be 4.75% for a continuing student; 5.375% for a graduate; and 6.125% for a parent.

Those rates will rise to 6.625%; 7.25% and 8%, respectively, July 1.

Only those getting consolidation applications in before June 30 can lock in the lower rate, Scherschel said.

Students also need to be cautious, experts say, because federal student loan rules can be tricky. Those with only one loan -- or one lender -- must go to their current lender to consolidate, unless they’re in the direct loan program with the federal government.

If that lender is unwilling or unable to consolidate, the student can seek to consolidate with another lender. Going to a lender that is not qualified to consolidate that loan could cause students to miss their window of opportunity.

Students with questions can call the Education Department’s hotline at (800) 4-FED-AID or go to its website at www.ed.gov.