Beginning July 1, interest rates on in-school Stafford and Parent Loans for Undergraduate Students (PLUS) loans will be fixed, as opposed to the variable interest rate scheme of past years. Families who have already taken out Stafford or PLUS loans are likely to see dramatic increases in their variable rate loans if they do not consolidate their loans by June 30 when the Department of Education resets interest rates according to the price of the 91-day Treasury Bill auction.
Out-of-school interest rates on consolidated Stafford loans will be fixed at 6.8 percent and PLUS Loans at 8.5 percent. In-school consolidated Stafford loans will accrue interest rates at a fixed rate of 4.75 percent, as opposed to the variable interest rate applied on unconsolidated loans which is slated to rise to 7.13 percent beginning in July.
The federal student loan programs use the rate of the 91-day Treasury bill as the basis to adjust interest rates for Stafford loans, according to Larry Mueller, director of financial aid at the Darden School.
Last year the variable interest ratewas not a fixed rate, so it floated each month and fell to almost 3 percent last August, according to Director of Student Financial Services Yvonne Hubbard.
Students with Stafford loans are advised to consolidate their loans in order to maintain a lowered interest rate, she said.
By consolidating their Stafford loans, students will lock in a fixed interest rate of 4.75 percent while in-school, which will save them money in the future, she added.
Some banks even offer their students special benefits for consolidating their loans, Mueller explained.
For example, Bank of America, the University's preferred lender, offers their borrowers a 2.5 percent interest rate reduction when they go into repayment for consolidating their loans, Hubbard said.
She explained that until last week, students had to consolidate their loans with the bank that they had taken the loans out with. Now students can take into account other factors when consolidating a loan, such as a bank's reputation, their benefits or if a student has a pre-established relationship with another bank.
One drawback of consolidating loans is that students lose the six month grace period after graduation that applies to unconsolidated loans and must enter repayment immediately after graduation, Hubbard said.
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