A r c h i v e d  I n f o r m a t i o n

FOR RELEASE
May 25, 2000

Contact:
Karen Santos Freeman
(202) 205-1531
Stephanie Babyak
(202) 401-2311
Jane Glickman
(202) 401-1307

BORROWERS COULD SAVE BY CONSOLIDATING COLLEGE LOANS NOW AS A
HEDGE AGAINST EXPECTED HIGHER INTEREST RATES

Students who move quickly may be able to save money by consolidating college loans now before new -- and most likely higher -- interest rates become effective July 1.

Student loan interest rates are adjusted annually according to a formula based on the interest rates of the 91-day Treasury bills. Since last year, the Federal Reserve has increased the short-term lending rate by nearly 1.25 percentage points. This means that borrowers could see their Stafford loan rates rise from current rates -- which range from 6.32 to 7.72 percent -- to a rate approaching the 8.25 percent cap. Rates on PLUS loans for parents with dependent undergraduates could rise from current rates -- ranging from 7.72 to 7.98 percent -- to the 9 percent cap.

"Consolidation is an excellent debt management tool," said Greg Woods, chief operating officer of the U.S. Education Department's office of Student Financial Assistance (SFA). "Smart borrowers can manage their student debt by consolidating their loans now to avoid the predicted rate increase and lock in at current rates which are at an all-time low."

Through loan consolidation, multiple outstanding student loans are combined into a single loan, and the interest rate is fixed for the life of the loan. Though individual circumstances may vary, additional benefits may include eliminating the hassle of dealing with multiple lenders, calculating loan payments based on income, and extending the repayment period.

Under the William D. Ford Federal Direct Student Loan Program, the consolidation rates are based on the weighted average of the borrower's underlying loans rounded up to the nearest one-eighth of a percentage point. Private lenders who participate in the federally guaranteed loan program may also offer consolidation opportunities. Borrowers may consolidate through the direct loan program if they have a direct loan or if their private lender does not offer a comparable interest rate or acceptable repayment terms. Borrowers who consolidate while in school or during their grace period could benefit from additional savings.

"Consolidation offers the potential to save significant amounts of money, and I encourage all eligible borrowers to at least look into this opportunity," Woods said.

For example, a borrower with $20,000 in student debt might save an estimated $1,500 in interest over 10 years (based on a standard 10-year repayment plan) compared with repaying that same loan at the projected interest rate after July 1. The interest savings would increase to $3,800 for a loan with a 20-year repayment plan.

But Woods added that borrowers must act now. The weighted average interest rate is calculated using the interest rate that is in effect on the date loan holders certify the underlying loans -- not the date the consolidation application is submitted. Borrowers who wait until the last minute may be too late to get the rate now in effect.

"Borrowers should review all their options and make the decision that best suits their individual financial situation, but consolidating now is certainly a good move for many," Woods said.

SFA helps about 8.5 million Americans through school each year and administers student loans and grants totaling about $50 billion a year. As the federal government's first performance-based organization, SFA strives to improve customer satisfaction while cutting the costs of administering student aid programs.

For more information about student loan consolidation, visit www.loanconsolidation.ed.gov or call 1-800-557-7392 (TDD 1-800-557-7395).

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