Student loans are about to get more expensive.

As part of a $40 billion budget-cutting effort, the Senate voted on December 21 to raise the interest rate on Stafford student loans to a fixed 6.8% from the current adjustable rate of 5.375%. So if you haven't yet consolidated your loans to lock in today's low rates, don't delay.

The bill still awaits final approval in the House of Representatives, but experts say it's a shoo-in. A vote is scheduled for February 1, and President Bush is expected to sign the bill into law soon after. The change is scheduled to take effect July 1. "This is a no-brainer," says Mark Kantrowitz, publisher of FinAid.org. "It's worth your while to consolidate now." Why? Because rates will start creeping higher as the fixed-rate deadline approaches, he says. You may have just a few months left to secure the lower rates.

For recent grads the rate hike would add up to big bucks. On a ten-year repayment plan, for example, the fixed 6.8% rate would cost you an extra $86 for every $1,000 you've borrowed. That means on a $25,000 loan, you'd have to fork over $2,150 more than you would have paid at the lower rate. A medical or law student with $125,000 of debt would pay an extra $10,750.

The higher fixed rate would be even more costly for borrowers in the grace period before their loans enter repayment. If you've graduated within the past six months, you can consolidate your loans and lock in a 4.75% interest rate. Wait too long and the jump to 6.8% would cost you an extra $123 for every $1,000 borrowed.

How low can you go?

Right now, the interest rate on Stafford loans is adjusted every year but cannot exceed 8.25%. The new fixed rate is actually in line with the historical average. It will help keep costs down in a high-rate economy, but it will prohibit students from benefiting when rates drop.

Over the past few years borrowers have saved thousands of dollars on their student loan bills thanks to record-low rates. Stafford loans have charged less than 6% interest for the past five years. The rate bottomed out in 2004 at 3.37% -- 2.77% for students in their grace period -- and has since moved higher.

When you consolidate, you lock in a weighted average of the current rate on all your loans. And Stafford-loan borrowers can consolidate before graduation if they participated in the federal government's direct-loan program, which means they must have at least one direct loan or be studying at a school in the direct-loan program. Borrowers who have loans only from private lenders in the Federal Family Education Loan program cannot consolidate while in school.

If you've already consolidated, you can't do it again unless you have new education loans to fold in.

The act of consolidating will lose much of its financial incentive after the bill goes into effect. The rate on loans issued after July 1 will already be locked in. If you borrowed from more than one lender you could consolidate for the sake of making a single monthly payment. Or you could consolidate to take advantage of non-traditional repayment plans. But doing it to secure a lower rate will no longer be an option.

Changes to PLUS loans

Students aren't the only ones who will feel the financial pinch under the new law. Parents will also pay higher rates on PLUS loans. The law would raise the rate to a fixed 8.5% from today's variable rate of 6.1%. It would also make PLUS loans available to graduate and professional students -- not just to parents of dependent undergrads.

But with such a high rate on PLUS loans, borrowers may be able to find better deals elsewhere. "If you've got good credit, the private education loans for the upcoming year are going to be competitive," says Kantrowitz, who estimates some may run a full percentage point lower than the going rate on PLUS loans. So it could pay to shop around. Keep in mind that loans from private lenders carry variable rates -- which could go higher or lower over the life of your loan -- while the PLUS loan rate is locked in.

See Student Loans 101 to learn more about the different types of education loans available.

Paying the piper

Consolidating is a good first step to saving money on your student loans. Make the most of that savings and find other ways to cut your costs even further:

• Trim your interest rate. If you pay electronically, you can net a 0.25% rate reduction. Most lenders also reward consistency -- make on-time payments for two years, for example, and you might get an extra 1% knocked off your rate.

• Write-off interest on your taxes. You can deduct up to $2,500 in student-loan interest if your adjusted gross income is less than $50,000 (single filers) or $100,000 (married filing jointly).

• Stick to the ten-year repayment plan. If you can afford the monthly payment, it's best to pay off your loan sooner. If you qualify to stretch your loan out over 20 or 30 years, you'll erode any savings you realized by consolidating because you'll pay more interest over the longer time frame. (Learn about the benefits and drawbacks of different repayment options.)

MORE: Kiplinger.com | Your Money | College & Family | Column

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