Last Chance to Lock in

It seems like only yesterday that student-loan rates were sinking faster than a December sun. Alas, the days of magically vanishing -- or modestly rising -- rates are about to end. Starting July 1, the Deficit Reduction Act of 2005 will set a fixed rate of 6.8% on new Stafford loans, about two percentage points above this past year's lowest rate. Similarly, PLUS loans for parent borrowers will be fixed at 8.5%, up from the current 6.1%.

But the fixed rates won't apply to outstanding Stafford and PLUS loans. On those loans, rates will continue to change each July 1 based on the 91-day Treasury-bill yield set the last Thursday in May. The T-bill rate is expected to rise, so it pays to consolidate your loans and lock in the lower rate.

Things get a little tricky if you consolidated last spring to take advantage of bottom-cruising rates (as low as 2.87% for Stafford loans and 4.17% for PLUS loans) and have since taken out new loans. You can consolidate the new loans, but you'll want to keep the two consolidations separate, says Gary Carpenter, executive director of the National Institute of Certified College Planners. "If you roll an old consolidation into a new one, you get a blended rate -- the lower rate is lost," says Carpenter. And you may have to shop for a lender; some balk at consolidating loans of less than $7,500.

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Although financial-aid packages were calculated this spring, next fall's freshmen will pay the post-July, fixed rate on Staffords; likewise, PLUS loans for parents of incoming freshmen will carry the new fixed rate. However, parents of currently enrolled students can apply for a PLUS now and consolidate to lock in this year's rate, says Mark Brenner, of College Loan Corp., which makes such loans. Ask your school's financial-aid office for details.

Other options. After July 1, parents choosing between a PLUS loan with an 8.5% fixed rate and a variable-rate home-equity line of credit should take a closer look at the latter, says Carpenter. The average rate for equity lines was recently 7.67%, and interest is deductible.

With rates fixed on Stafford loans, private loans, which are issued at variable rates, could someday end up costing less than Staffords. Sallie Mae, the largest of the student-loan companies, offers private loans at the prime rate -- lately 7.5% -- with no fees for borrowers who have a good credit history.

Even if rates head south, borrowers "should exhaust federal loans first," says Sallie Mae spokeswoman Martha Holler. Unlike private loans, payments on those loans can be extended, deferred or forgiven in certain cases.

A mixed bag. As for the other provisions of the Deficit Reduction Act, they represent "a mixed bag" for undergraduates, says Brenner. For Stafford loans, the law boosts the maximum amount you can borrow in each of the first two years of college (the total amount remains the same), phases out origination fees and expands Pell Grants for math and science students. Married couples will no longer be able to consolidate loans taken out separately into a single loan. And, as of July 1, students can no longer consolidate Staffords while they're still in school.

But Brenner says the changes "should in no way discourage American families from applying for the college of their choice." There's plenty of money for students who need it, he says, and federally sponsored loans remain "a hell of a deal."