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No-brainer choice for student-loan clients

Updated: May 3, 2013 12:14PM

Originally published: June 17, 2002

Rates on federal student loans are set to plunge. If you have those student loans, you’re about to get an incredible opportunity to lock in new, low rates for the life of your loan. But you’ll have to wait until July 1--and you must understand the rules.

Federally subsidized student loans, such as Stafford loans, have floating interest rates. They’re tied by formula to Treasury bill rates, which are set at auction. As you’ve probably noticed, short-term interest rates have dropped like a stone in the past 12 months.So, later this month, when the new rate is announced for the year starting July 1, 2002,the rate on loans taken out since 1998 could drop from the current 5.99 percent to slightly above 4 percent for the coming year. That will happen automatically.

Student-loan consolidation offers big break

But the real opportunity comes from a rule that allows each graduate just one chance to consolidate student loans and lock in the rate forever. You can consolidate your student loans even if you’re in a period of forbearance--where interest is being accrued, but you’re not required to make payments because of a financial hardship. But you can take advantage of this opportunity only once, so you want to pick a moment when you think rates are at or near their lows.

The consolidated loan rate is based on the current blended rate of all your loans, rounded up to the next one-eighth of 1 percent. For example, if you have had Stafford loans since 1998, the current consolidation rate is 6 percent. But when rates change on July 1, the consolidation rate is likely to be slightly above 4 percent.

Unless you think rates are going to fall much further in the coming year, you’ll want to start the process of consolidating your loans right after July 1. But you have one full year to do the consolidating--until July 1, 2003--and in the meantime, the prevailing rate on post-1998 loans will automatically drop to the new expected level of just above 4 percent. In fact, if you have only one year remaining on your loans, you won’t need to consolidate, since you get the lower rate this year anyway.

The one thing you don’t want to do is consolidate now at the 6 percent rate.

When you’re ready to start the consolidation process, contact any one of your lenders.Or check in at popular Web sites such as,, or While all consolidators cap their loans at the federally determined rate, some may offer slightly lower rates. You should never pay a fee or charge for the consolidation process.

If you’re just graduating from college, you can benefit from a very special deal.You may already know that you have a 6-month grace period after graduation before you must start repaying your loans. But if you consolidate your loans within that six-month grace period, you’re entitled to an extra discount of six-tenths of 1 percent on the consolidated rate. Thus, if the consolidated rate is 4.1 percent, for instance, you could get a 0.6 percent discount, bringing your lifetime rate down to 3.5 percent!

Most loan consolidators will grant a one-quarter of 1 percent discount off the interest rate if you sign up for automatic monthly deductions from your checking account. That means the 3.5 percent locked-in rate for new grads could drop to 3.25 percent.

And here’s one more possible deal. Many lenders will drop your rate another full percentage point if you’ve paid on time every single month for 4 or 5 years. Ultimately, your final years of the loan could have an interest rate of only 2.25 percent!

Older loans and Plus Loans

Rates on pre-1998 loans and Plus Loans (those made to parents) will also fall on July 1. They use a different formula, but should be at least one full percentage point below the current 6.79 percent being charged on Stafford loans made between July 1, 1995, and June 30, 1998. Plus Loans, currently carrying a 6.79 percent rate, will also likely fall below 6 percent.

Remember, your student loans were a worthwhile form of debt because they financed a growing asset--your mind. Now use that knowledge to pay down your loans as cheaply and quickly as possible. That’s the best use of your education. And that’s The Savage Truth.

Terry Savage is a registered investment adviser and is on the board of directors of McDonald’s Corp. and Pennzoil-Quaker State Co. Send questions via e-mail to She appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast.

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