Under the new law, interest rates on federal Stafford loans issued after July 1, 2006 will jump from the current variable 4.7% (for in school borrowers) to a fixed 6.8%, irrespective of market interest rates. Interest rates on federal PLUS loans (Parent Loans for Undergraduate Students) will jump from the current variable 6.1% to a fixed 8.5%.

While the new law will not affect loans taken out prior to July 1, current federal borrowers should also expect a similar 30%+ jump in their payments when the government completes its annual reset of student loan interest rates on July 1. Under current law, the government resets student loan interest rates every July based on then prevailing market interest rates. The benchmark interest rate used by the government, the 91-day Treasury bill rate, has risen approximately 30% since July 2005 and the Federal Reserve is expected to push market interest rates even higher between now and July 1.

As a result, according to The Journal, that someone with $20,000 in student loans can expect to pay over $2,000 more in interest over the life of the loan.*

One way current federal borrowers can avoid paying more on their loans is to consolidate under the Federal Student Loan Consolidation Program. In recent years, "borrowers have been able to shave thousands of dollars in interest from their loans by consolidating loans at record low rates," according to USA Today.** ( Read the USA Today article.)

By consolidating prior to July 1, 2006, borrowers can lock in a single, historically-low fixed rate on their loans (as low 4.75%, and the fixed rate can drop even lower to 3.5%, after taking into account additional benefits offered by many consolidation lenders).

• Request information on saving by consolidating your loans.
• Find out how much you can save through Vault's Loan Consolidation Service.

For current students interested in consolidation timing is particularly important.

• Students leaving school prior to June 30, 2006, can complete their consolidation applications anytime between now and June 30, but should keep in mind that last year major processing delays occurred as the deadline approached. Most lenders will then hold a student's consolidation application for processing until after the student's graduation date, thus locking in current rates while still preserving the benefit of the six-month "grace period" following separation from school during which no payments are required.

• Students who will be in school beyond June 2006, should carefully consider applying for "in-school" consolidation. Currently, U.S. Department of Education regulations permit students who are in school to consolidate their loans, although the new law is set to eliminate that option for students. Just as with a typical consolidation loan, repayment on an "in-school" consolidation loan does not begin until after the borrower leaves school, but "in-school" consolidation does require the borrower to waive the six-month "grace period" following school, during which no payments are required. The practical effect of waiving the grace period is that the borrower will lose six months of government-subsidized interest payments on his or her subsidized Stafford loans (the interest on unsubsidized Stafford loans is added to the principal during the grace period).

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Have questions? Please drop Vault's expert, Peter Wilkniss, a line at pwilkiniss@vault.com. Peter holds a BA in Economics for the University of Virginia and a JD/MBA from Columbia (with tons of student loans!). He practiced law at Wachtell, Lipton, Rosen & Katz in New York, and held senior financial management positions on Wall Street, before helping start and run a student loan company.

*Congress Cuts Funding For Student Loans, Wall Street Journal, December 21, 2005, Section D1.
**Consolidating student loans now will save on interest, USA Today, December 22, 2005, Online Edition.