July 1 Brings Record-Setting Drop in Student Loan Interest Rates

PHOENIX, AZ -- 07/02/08 -- Both new and current student loan borrowers of certain federal Stafford student loans saw two interest-rate drops go into effect yesterday that could save them significant amounts of money on these fixed- and variable-rate student loans. Borrowers with variable-rate Stafford loans saw the biggest rate drop -- three percentage points -- due to the general interest-rate cuts made by the Fed over the past year.

Borrowers holding both subsidized and unsubsidized variable-rate Stafford student loans -- those Stafford loans that were disbursed between July 1, 1998, and June 30, 2006 -- received their record-setting rate reduction when the interest rate on those student loans reset on July 1, as it does every year.

As a result of the rate cuts made by the Fed, borrowers with variable-rate Stafford loans that are in repayment or forbearance saw their interest rate drop from 7.22 percent to 4.21 percent. Borrowers with variable-rate Stafford student loans who are still in school, in their grace period, or in deferment saw the interest rate on their student loans go from 6.62 percent to 3.61 percent.

Borrowers with subsidized Stafford loans that were disbursed on or after July 1, 2006, also saw a reduction in their interest rate, albeit a much smaller one. The rate on these student loans, which was previously fixed at 6.8 percent, dropped to 6 percent yesterday and will continue to fall over the next four years for both new and current borrowers, eventually dropping to 3.4 percent in 2011.

This phased-in reduction to subsidized Stafford loan rates comes as part of the College Cost Reduction and Access Act of 2007, which also increased federal grant aid to needy students. The fixed rates on subsidized Stafford student loans will be incrementally reduced on July 1 each year until July 1, 2012, when interest rates are set to revert back to 6.8 percent, barring new legislation that keeps the rate reductions in place.

Unsubsidized Stafford student loans are unaffected by the legislation. Unsubsidized student loans are those in which borrowers are responsible for all interest that accrues, even if they are not currently required to make any payments on their student loan, as when they are in school at least half time or in an authorized period of deferment. With subsidized college loans, on the other hand, the government will pay any interest that accrues while borrowers are in school at least half time, in an authorized deferment period, or in the grace period they are granted after leaving school, before they must begin repayment on their college loan.

The interest rate on unsubsidized Stafford loans that were disbursed on or after July 1, 2006, remains fixed at 6.8 percent.

Yesterday's rate reductions also apply to federal consolidation loans, which allow borrowers to bundle all their eligible federal college loans -- both fixed-rate and variable, subsidized and unsubsidized -- into one single student loan with a fixed interest rate. Those who consolidate their Stafford student loans while in their six-month grace period could consolidate at a fixed rate as low as 3.61 percent.

"This is not only the biggest drop ever in the in the interest rates on variable loans," says Mark Kantrowitz, publisher of the financial aid website FinAid.org, "but the lowest rates in the history of the student loan program."

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