Federal college loan rates to hit lowest level

Wednesday, May 7th 2003, 12:00 am
By: News On 6

WASHINGTON (AP) _ Some relief is on the way for families struggling to cover soaring college tuition: Lower interest rates are about to make federal loans cheaper than ever.

The changes, which could save borrowers hundreds to thousands of dollars over time, come as American families increasingly rely on debt to finance college education.

The interest rate on Stafford loans is expected to fall from 4.06 to 3.42 percent, the lowest since the program began in 1965. These loans are open to all students, and the government will pay the interest for financially needy students while they're in school.

The rate for another federal borrowing plan _ the Parent Loan for Undergraduate Students _ will likely fall from 4.86 percent to 4.22 percent.

And those who consolidate their loans can lock in a rate as low as 3.5 percent, down from 4.13 percent, according to Sallie Mae, the largest source of student loans.

For example, someone who consolidates $25,000 in recent debt could save almost $2,000 over 20 years, or $8 a month.

These new rates for the coming school year would apply to loans taken out after July 1, 1998. Those who borrowed earlier would also see savings depending on when their loans were issued.

These lower rates, while likely, are not guaranteed. Final interest rates on federal student loans will be determined at the end of May based on short-term treasury bill rates then.

``We're all seeing the rising cost of higher education. Here's the silver lining: Financing has become less expensive,'' said Steve Stocks, a financial aid executive with Sallie Mae.

Every dollar may help. As states face their worst fiscal crisis in decades, many have cut spending on higher education. And every state raised tuition at four-year schools this year; 16 increased costs by more than 10 percent, according to The National Center for Public Policy and Higher Education.

The average yearly tuition and fees at a four-year school is $4,081, and room and board costs another $5,582, the College Board reports.

Lower loan rates are fine, but they could encourage state and school leaders to put even less emphasis on grants and college support, said Patrick Callan, the center's president.

``Everyone is borrowing more, and we really don't talk about that very much,'' Callan said. ``We don't ask questions like, 'At what point are we hurting the ability of young families to buy a house?' We are oblivious to that. Loans are kind of the easy way out.''

Nationally, federal loans make up the greatest share of student aid. The loans come directly from the government or from private lenders with a government-backed guarantee.

Student borrowers have until six months after college to begin repaying federal loans. Those who consolidate during the grace period could lock in a rate as low as 2.88 percent.