Graduated Interest

Act Fast to Lock In College Loan Rates, Set to Rise on July 1

College costs keep spiraling upward, and now the cost of borrowing to pay for higher education is about to spike, too.

Students, and their parents, have taken comfort in a half-decade of ultra-cheap college loans, loading up on debt to cover the bills. About 8 million people borrowed $60 million this year in education loans issued or guaranteed by the federal government. But now, only those who act quickly will be able to keep a lid on the cost of that debt.

A combination of rising interest rates and legislative changes to the student loan program will alter the student loan landscape on July 1. Rates on existing Stafford loans -- the bedrock government-guaranteed student loans that 44 percent of full-time undergraduates rely on to pay tuition bills -- change annually and are pegged to 91-day Treasury bills. For the second year in a row, T-bill rates have jumped nearly two percentage points, taking Stafford loan rates along with them. Last June, rates on Stafford loans in repayment stood at 3.37 percent. On July 1, they will top 7 percent.

There's more: Under legislation Congress approved in 2002, rates on all new Stafford loans issued after July 1 will carry a higher, fixed interest rate of 6.8 percent. (Rates on older loans will continue to float.) Student advocates pushed for the change at a time when rates were rising to simplify the student loan program and to fix the rate at its historical average. In return, lenders retained an interest-rate formula that ensured student loans would be profitable in the intervening years.

The new fixed rate means student loans will seem cheap when market interest rates are high and expensive when they're low.

"It definitely scares me," says Jordan McNerney, a senior at George Washington University, who expects to face payments of about $1,000 a month on $85,000 in total debt when he graduates in a year. "That's basically doubling my rent when I get out of school," he says.

When Stafford loans are not enough, some 800,000 parents each year take out government-sponsored Parent Loan for Undergraduate Students, or PLUS loans, which can cover up to the full cost of college. Rates on those loans are also pegged to Treasury bill rates and will experience similar increases, to 7.94 percent from 6.1 percent on existing loans. New PLUS loans will have a fixed rate of 8.5 percent for most borrowers. (Starting next month, graduate students will also be eligible for these loans.)

To cope with this ballooning education debt, more families have been turning their student loans into mini-mortgages, stretching payments out over 20 or even 30 years. That keeps the monthly payment low but also increases the total cost of the loan.

Many also have been taking out consolidation loans to refinance the debt. That converts them from variable-rate loans to a fixed-rate loan. But they need to act quickly: To lock in current rates, applications must be filed by June 30. The easiest way is to apply online.

Thanks to legislation passed this week, borrowers can consolidate their loans with any lender, no matter who holds their current loans. Until now, the so-called single-lender rule forced borrowers to stick with their current lender if all their loans originally came from that lender.

John Szkutak of Fairfax recently trimmed his monthly loan payments to $176 from $336 by consolidating the $30,000 in PLUS loans he has borrowed to pay for his daughter Stephanie's first two years at George Mason University. Before the end of the month, he'll also help his wife, Meghan, who is a semester away from a psychology degree at George Mason, consolidate her Stafford loans.

By locking in a 6.125 percent rate on his PLUS loans, Szkutak will pay about $8,000 less in interest than if he had waited until after June 30 and consolidated at 8 percent.