Rates on college loans to rise from record lows

updated 6:15 p.m. ET May 31, 2005

NEW YORK - Interest rates on federally backed loans for college students are set to jump by a record amount on July 1, the Department of Education said Tuesday.

Based on the results of a Treasury bill auction, the in-school rate on the federal Stafford loan will rise by 1.93 percentage points to 4.7 percent.

The rate for loans in repayment will rise by the same percentage to 5.3 percent, while the PLUS loan rate for parents will rise to 6.1 percent.

The rates are based on the three-month Treasury bill auctioned Tuesday. That bill carried a discount rate of 2.935 percent. The discount rate a year ago, before the Federal Reserve started to raise its guiding interest rate, was 1.050 percent. That resulted in the lowest interest rates ever for student loans.

Students can still consolidate their loans at rates as low as 3.375 percent until July 1. For the first time, it is also possible to consolidate bank-based Stafford loans while still in school, by putting them in repayment status, then asking to defer payments until graduation.

A graduating student with $20,500 in loans, the average for borrowers last year, will save $2,842 over the course of a 10-year repayment by consolidating before the new rates go into effect, according to the College Loan Corp., a San Diego-based lender.

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