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Interest Rates on Student Loans to Increase in July

June 01, 2005|From Bloomberg News

U.S. students receiving federally backed education loans will be charged an annual interest rate of 4.7% beginning in July, an increase of 1.93 percentage points from the current rate and the largest rise in 24 years.

Former students repaying their loans, which they must begin doing six months after graduation, must pay interest at a 5.3% rate beginning July 1, also a 1.93-point increase.

Rates on the so-called Stafford loans are adjusted annually based on yields on three-month Treasury bills in the final weekly auction of May, which was held Tuesday.

The jump in T-bill yields over the last year is a direct result of the Federal Reserve's credit-tightening campaign. The Fed has raised its key short-term rate from 1% last June to 3% now.

Rates on federally backed student loans taken out by parents will be charged interest at a rate of 6.1% starting July 1.

The student loan rate increases are the largest since the rate on loans in repayment increased to 9% in 1981 from 7% in 1980. Rates had been dropping every year since 2001.

The average undergraduate borrower has $19,000 in loans outstanding, according to the U.S. Public Interest Research Group.

Even though rates are rising, "Student loans still carry the most consumer-friendly terms that you'll find anywhere," said Tom Joyce, spokesman for SLM Corp., the biggest lender of money to U.S. college students.

"It would be very unfortunate for families or students to hear this news and think that this puts college out of their reach," he said.

The pending rate increase, meanwhile, has kicked off a rush among both lenders and students to consolidate loans by July 1. Loans that are consolidated carry rates based on the weighted averages of the separate loans at the time of consolidation, meaning they won't increase after July 1.

Calls and Internet inquiries to College Loan Corp., a major provider of student loans, are about 25% higher than normal, said Mark Brenner, the firm's president.

The rush has been accelerated by a U.S. Department of Education's advisory issued May 16, in which the agency said that students still in college may consolidate their government-guaranteed loans.

Students typically had waited until they left college to consolidate the various loans they accumulated during their years in school. The Education Department's advisory opinion was important to students nearing the end of their college careers and hoping to consolidate before the July 1 rate increase.

Those earlier in their college careers might opt against consolidating because of risks that include forfeiting the six-month grace period for repayment after graduation.

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