Sunday, June 27, 2004
By Sarah Kellogg
Washington Bureau
MLive.com

WASHINGTON -- Interest rates are creeping back up for mortgages and consumer loans, but they're going down for federally guaranteed student loans, which are expected to hit a 39-year low on Thursday.

Federal officials say that's good news for students who have faced major increases in university tuition and room-and-board payments in the last five years and seen their college loan debt nearly double.

"This is a great opportunity for students and their families," said U.S. Rep. Dale Kildee, D-Flint, who sits on the House Education and the Workforce Committee. "These lower interest rates will help offset the debt students are facing as they prepare to leave school and go out in the work world."

In 2002, the median debt for U.S. students graduating with a four-year degree was $16,500, up from $9,500 in 1997, according to Nellie Mae, a student loan provider.

Rates on Stafford loans will drop to 2.77 percent if students are still in school or within six months of having left school.

Stafford Loans are made through either the Federal Family Education Loan (FFEL) Program or the William D. Ford Federal Direct Loan (Direct Loan) Program. Students loans from FFEL come from banks, credit unions or other lenders, while Direct Loans come from the federal government.

For students already working on repaying their loans, the rate will be 3.37 percent.

Parents who have Parent Loans for Undergraduate Students (PLUS) will see rates fall to 4.17 percent.

Financial aid experts say the time is now for students and parents to consider consolidating prior loans as well, noting that U.S. interest rates appear to have bottomed out and that rates for student loans in 2005 likely will be higher.

"It doesn't take a rocket scientist to realize this is a good opportunity," said Pat Scherschel, loan consolidation product executive for Sallie Mae, the nation's largest student loan lender.

Most federally guaranteed student loans -- Perkins, Stafford and PLUS -- issued after July 1998 qualify for consolidation and the lower interest rates and longer repayment periods.

Consolidated loan interest rates are calculated based on an average of the rates of a borrower's outstanding loans. For Stafford loans, the lowest rate would be 2.875 percent and for PLUS loans the rate would be 4.25 percent.

"Last year there was still a sense that interest rates weren't going to go up and might even go down," said Margaret Rodriguez, senior associate director of the University of Michigan's financial aid office. "There's a sense now that this is a low point, and we might get an upturn. I think that's why students are taking the consolidation option more seriously."

But financial aid experts urge students and families to be cautious in consolidating loans. Each student represents a unique borrowing situation -- one that may benefit or be injured by strict rules governing loan consolidations.

"You need to be careful about specifics because every student's situation is different," said Peggy O'Neill, assistant director of the Office of Financial Aid at Saginaw Valley State University. "That's why we haven't taken it upon ourselves to advertise it. I don't think we would want to communicate something that might be misleading."

By consolidating loans, students can lose perks such as opportunities to defer repayments and to qualify for loan forgiveness by the federal government for taking public service jobs. And consolidation loans last forever. Students cannot consolidate again unless they go back to school and get another loan.

Financial aid experts also caution students to be careful when consolidating their college loans with their spouse's loans. While allowed under the law, it has caused a number of thorny repayment situations when couples divorce.

Acting now is even more important because some members of Congress are pushing legislation that would replace fixed-interest rates on consolidated loans with variable rates. They would establish a rate cap of 8.25 percent.

The idea has gotten some traction in budget-conscious Washington in recent months, especially after a U.S. General Accounting Office report estimated that the federal government paid out more than $2 billion in fiscal 2003 to banks and other lenders for consolidated college loans.

Colleges, banks and other lenders issuing federally backed student loans are guaranteed a certain rate of return by the government. If interest rates dip below agreed-upon levels, the government pays a subsidy to lenders to maintain their profit margins. This does not apply to Direct Loans, which are paid out of the federal Treasury.

"An increasing share of aid is flowing not to incoming low- and middle-income students struggling to achieve a higher education, but to former students who have already received an education and entered the workforce," U.S. Rep. John Boehner, R-Ohio, who sponsored the variable rate measure, told a House subcommittee last month.

Boehner says the money saved by switching to variable rates, thus decreasing the amount of subsidy payments made to lenders, could be pumped right back into federal loan and grant programs.

The proposal, which is pending in the House, has not been welcomed by most colleges or student groups -- both of whom feel it ultimately will only increase the debt burden on students.

"Is this the best we can do for students when we're not increasing grant funds and costs are going up?" asked Phyllis Hooyman, director of Hope College's financial aid office. "What we're doing here is producing our future leaders and businessmen. Do we really want them swamped with debt?"

Students say the plan could add another $5,500 in interest costs to the typical student's loan.

"Denying student borrowers a choice to lock in a low fixed-interest rate makes college more expensive, just as tuition levels rise, state aid is being cut and students are facing double the loan debt they faced just seven years ago," said Rebecca Wasserman, president of the U.S. Student Association, a student advocacy group. "Consolidation is an important tool that helps low- and middle-income students manage their debt."

-- Students and families interested in learning more about loan consolidation can go to their college financial aid office; the U.S. Department of Education Web site at http://www.loanconsolidation.ed.gov/ and click on "FAQs" or call 1-800-4-FED-AID; or go to Sallie Mae's Web site at http://www.salliemae.com/ and click on "Forms, FAQs, E-mail and Phones" under Customer Service.

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