Graduated Interest

This is the last hurrah, however, for borrowers such as Szkutak who are consolidating before they are done borrowing. Last year, Congress changed the rules so that beginning in July, borrowers will no longer be able to consolidate their debt while the student is in school.

"I'm lucky that I can do this," says Szkutak, who is an associate director of financial aid at George Mason.

Even without the rules change, consolidation is likely to become a less attractive option because new loans will have fixed rates.

"The key thing driving consolidation in the future will be the borrower's need for payment relief," says Patricia Scherschel, vice president of loan consolidation for Sallie Mae, the country's largest provider of consolidation loans. "Borrowers won't have to worry about making a rate play."

Shannon Becker, a medical student at Georgetown University, is consolidating her medical school loans for the second time. Last year, she locked in a rate of 2.875 percent on $110,000 in debt. This year, she borrowed another $64,000, and she will roll both sums into a new consolidation loan. Her new interest rate will be a weighted average of the 2.875 percent she already locked in on the $110,000 and the current 4.75 percent rate she will secure on the next $64,000. (Borrowers such as Becker who consolidate while in school or during the six-month grace period following graduation fix their loans at the lowest possible rates.) Becker says she will opt for the longest possible repayment term to keep her loan payments manageable.

But therein lies the catch to consolidation loans: Because they were designed to help students who need payment relief, they automatically extend the length of your loan, which can wind up costing more overall because of the extra interest payments.

The way to really pay less interest overall is to lock in the lower rate and then pay on the original 10-year schedule. There is no penalty for prepaying. If paying over 10 years is impossible, borrowers can consider boosting payments later on, when their financial situation improves.

Once the rush to consolidate is over and the new, fixed rates take effect, parents may want to look for alternative loan sources before they commit to a PLUS loan. Szkutak, for instance, plans to finance his daughter's last two years of college using a second mortgage at 7.8 percent rather than a PLUS loan at 8.5 percent. Aside from second mortgages or home-equity credit lines, borrowers can also shop among private lenders for rates that may be below 8.5 percent.

One silver lining: Despite the rate increases, student loan rates are still historically modest. "The interest rates that have been around for the last three years are an anomaly," says Sarah Bauder, director of financial aid at the University of Maryland. Two decades ago, when parents of many of today's college students were taking out their own student loans, rates of 8 to 10 percent were the norm.

Of course, those borrowers didn't have to cope with today's college costs.