By law, interest rates on most federal student loans are variable and are calculated based on a statutory formula that uses the interest rate of the 91-day Treasury bill set at the last auction in May of each year plus 1.7 percent for loans in an in-school, grace, or deferment status, and 2.3 percent for loans in a repayment status. The new rates will be effective beginning July 1, 2005 for any loan that was or is first disbursed on or after July 1, 1998.

The U.S. Treasury held an auction today (May 31) on the 91-day Treasury bill that set the rate at 2.998. As a result, the interest rate for the one- year period beginning on July 1, 2005 for most Federal student loans for borrowers who are in-school or are in a grace of deferment period, will be set at 4.7 percent and loans for borrowers in repayment will be set at 5.3 percent.

July 1, 2005. This rate remains in effect until June 30, 2006. A new variable rate will be set next May/June that will be effective beginning on July 1, 2006.

Since interest rates on Federal Consolidation Loans, under both the FFEL and Direct Loan programs are fixed at the weighted average of the loans being consolidated, if borrowers consolidate their student loans before July 1, they can lock in the lower interest rate now in effect.

Borrowers should contact their lenders directly about consolidation opportunities. Borrowers with Direct Loans may call the direct loan consolidation number at 1-800-557-7392.

For additional information, please see the summary of FFEL and Direct Loan variable interest rates effective July 1, 2005.