by: Samantha Serum

With the rise and fall of interest rates in recent months, good news has been rare.

A drop in student loan interest and up to 3 percent drop for some student loan holders is a welcome occurrence.

Interest rates of federal Stafford loans, which were dispersed between July 1, 1998, and June 30, 2006, dropped from 7.2 percent to 4.21 percent on July 1. Federal Parent PLUS Loans dispersed during the same time saw a similar drop, resulting in a 5.01 percent rate.

Two-thirds or 65.7 percent of four-year undergraduate students graduate with some debt, according to Finaid.org. The average student loan debt among graduating seniors is $19,237 (including Stafford, Perkins, state, college and private loans), but not including debts taken on by parents for their child’s education, according to the 2003-2004 National Postsecondary Student Aid Study.

Similar rate drops were seen in loans dispersed between July of 1995 and June of 1998, resulting in Stafford loan rates of 5 percent and Parent PLUS loan rates of 8.05 percent for loans in repayment. Loans paid to students between July of 1994 and June of 1995 dropped to 5.01 for Stafford and 8.05 for Parent PLUS as have loans dispersed between October of 1992 and June of 1994.

The rates affect federal loans in repayment and unsubsidized. Loans not yet in repayment are considered in a “in school or grace period” state and may either be at the same rate or a different rate than those in repayment depending on the terms decided for the particular year they were dispersed.

Unlike most forms of loans, federal student loan interest rates are decided based on either a 91-day T-bill or one-year Constant Maturity Treasury rate.

The one-year Constant Maturity Treasury rate is updated after the Federal Reserve releases data on the first Monday of each month. An index of the average yield on United States Treasury securities adjusted to a constant maturity of one year, is based on the closing market bid yields on actively traded Treasury securities.

CMT is based on the state of Federal Reserve investments. The 91-day t-bill is a short-term debt sold at a discount at a competitive discount on a weekly basis. Investors purchase it at the discounted rate and redeem it at maturity at face value — it is not unlike a Savings Bond on a grand scale. Any interest rates tied to these two figures fluctuate with the state of the CMT and t-bills. Federal student loans are based on the rates in May each year, set to change July 1, and remain the same for a year.

Denis Collins of the Bradley County Initiative Credit Union explains the loans by comparing them to a CD.

“If you put a CD in a bank for a year, you know what rate you will make,” he said. “Most banks would pay you monthly, so they don’t owe the maturity at the end of the term — the CMT is a maturity the Federal Reserve owes to investors.”

The faltering economy is actually causing the rate drops. It is important to remember Federal Student Loan holders who consolidated loans at any point prior will not experience the rate drop — as their consolidation loan is conventional.

Loans dispersed after July of 2006 were offered at a fixed rate. The College Cost Reduction and Access Act of 2007 cut the fixed interest rates on newly originated subsidized Stafford Loans for undergraduate students to 6 percent (2008-2009), 5.6 percent (2009 to 2010), 4.5 percent (2010 to 2011) and 3.4 percent (2011 to 2012) with a return to 6.8 percent in 2012 to 2013.

Students are advised not to consolidate the fixed-rate federal loans, as it will actually raise their total interest rate. For students who attended school during the change to fixed-rate loans, it will be important to specify which loans should be consolidated (variable rate loans) and which should not (fixed rate loans) during the consolidation process.

However, with interest rates at a 10-year low, a consolidation loan may not be easy to secure.

Lee University Financial Aid director Michael Ellis said, “Because a lower interest rate makes consolidation less profitable for loan companies, it may become harder to find a consolidation loan.”

Ellis suggests contacting the holder of the loan about consolidation first. He advises students to visit www.studentaid.ed.gov and www.loanconsolidation.ed.gov for further guidance.

Ellis offered a few guides for students considering consolidation.

He said to find out the terms of the consolidation, not just what your monthly payment would be — some consolidation loans will lower payments by stretching them over a 20 or even 30 year term. A consolidation loan with no penalty for early repayment is also vital.

“It is also best to consolidate federal loans and private loans separately because federal loans often have lower interest rates,” said Ellis.

Loans based on Prime and Libor, including most private student loans, adjust quarterly. The prime interest rate has dropped to 5 percent. The lowest Prime has been in the past 10 years was 4 percent in 2003 and 2004, the 10-year high was 9.5 percent in 2000 and 2001. This means consolidating those loans could also be a good ideal.

Student loan consolidation is a “one-shot deal.” Once the loans are consolidated, they cannot be consolidated again — the rate you consolidate at will probably be the final rate.

Collins said, “People come here (Bradley Initiative Credit Union) wanting to pay off their student loans, sometimes because they are in default — usually we can’t touch those interest rates.”

Many prospective students and their parents find student loans and their management intimidating, while others don’t seem to take enough consideration of the responsibility they are committing to.

Geraldine Parks, director of financial aid at Cleveland State Community College, said, “I try to emphasize that they should take out what they need, but only what they need … I cringe when they ask ‘How much can I get?’”

Ellis said, “We can advise students, but ultimately, we cannot deny a student aid they can get.”

He advises parents to discuss budgeting and debt with students before they begin college and help them come up with a financial plan for college.

He advises students to “be responsible and manage their own financial destiny. ‘Ultimately, it is their responsibility.’”

Josh Allen, an employee at Starbucks who recently completed his financial aid exit counseling at Lee University, was not aware of the recent drop in Stafford Student Loan rates, which did affect him. He inquired about rates in early May during his exit counseling, but no projections in changes were available at the time (the 91-day t-bill which determines the July 1 change is announced on the last Monday in May each year).

Of financial aid he said, “Most of the time I had to find out myself — but my Dad raised me to be a go getter, so I was able to find out what I needed to know.” He does plan to pursue consolidation before his “grace period” expires, six months after graduation.

For former students paying back student loans, Collins offers some suggestions.

“If a student is having financial difficulties, they need to contact their lender immediately to pursue deferment or lowered payments they can manage,” he said.

He also advises people to always pay debt with higher interest rates faster, whether it is a car or credit card. However, he does advise pursuing payment of student loans before making extra payments on a house, because a house is acquiring equity while a student loan is just a debt.

“Paying a student loan is like paying any other debt. If you make the minimum payment, you will pay the most in interest over the term of the loan,” he said.

Students are offered a variety of options in how they pay back their loans, including Level, graduated and income based.

Generally speaking, level payments offer the quickest pay back with the least amount of interest paid, but will fluctuate with interest rate changes, because it names a date the loan will be paid back. Different options suit different students’ situations.

Collins said, “I get doctors, lawyers who don’t know their interest rate or the terms of the (student loan) — people should really be more aware.”

Parks said, “Sometimes I think it is instant gratification — the money is easy to get, which is wonderful for students who truly need it, but for immature students, it can be dangerous.”