Record low student loan rates offer relief

NEW YORK, New York (Reuters) -- Elaina Hernandez should feel lucky. In a tough job climate, she landed an accounting job at a Phoenix, Arizona, company right after receiving her undergraduate accounting degree.

Despite gaining a semblance of financial independence, Hernandez, 21, is not looking for a new car or apartment. Instead, she is worried about repaying $37,000 worth of student loans. "I'm not in a good position," she said.

Fortunately, relief is on the way for Hernandez and an estimated 1.3 million debt-laden college students who received their diplomas in recent months.

With interest rates on government-sponsored student loans set to drop to their lowest levels ever at the end of the month, experts advise new graduates to consolidate their student loans and cut monthly loan payments by locking in these historic low rates.

"This is great news for students. It's a great way to save money," said Ellynne Bannon, higher education advocate at the national headquarters for the state Public Interest Research Groups (PIRGs) in Washington, D.C.

In a recent study, state PIRGs said 39 percent of college students were graduating with an unmanageable level of student loan debt. An unmanageable debt load is defined as more than 8 percent of the borrower's monthly income going to pay student loans.

MORE STORIES • Student debt on the rise  • The perfect level of debt    Rate reductions: The latest rate decrease means a $300 savings per year for an average student borrower who takes out $17,000 in loans to complete a four-year undergraduate degree.

On June 30, interest rates on two of the most popular types of federally guaranteed student loans will fall nearly two full percentage points, matching last year's rate decline.

Interest rates on Federal Stafford loans issued on or after July 1, 1998, will drop to 4.06 percent from 5.99 percent, and those on Federal Parent Loans for Undergraduate Students (PLUS) will drop to 4.86 percent from 6.79 percent.

The latest rate decrease means a $300 savings per year for an average student borrower who takes out $17,000 in loans to complete a four-year undergraduate degree, repaying all the loans in 10 years, said Randy Behm, executive vice president at Key Education Resources, a unit of KeyCorp and one of the biggest U.S. student loan providers.

Lenders are offering incentives to entice college graduates like Hernandez to consolidate their student loans.

Key Education, for example, would trim a borrower's loan balance by 5 percent if he is on time with loan payments for three straight years.

Sallie Mae, the No. 1 U.S. student loan finance provider, offers to cut loan rates by up to another 1.25 percentage point if a borrower pays on time for four years directly from his or her checking or banking accounts.

Weighing your options

With eight separate student loans, Hernandez would be a prime candidate to consolidate and reap savings from the all-time low interest rates, according to experts.

But they warned that a borrower can consolidate federally guaranteed student loans only once. So for graduates who thought they locked in bargain interest rates last year -- which fell to 30-year lows -- they cannot consolidate again.

Most economists forecast that interest rates will certainly turn higher by next year as the economy recovers, so it is a good bet to consolidate now.

"If you think rates will go up, you should do it this year," Key's Behm said.

Moreover, once the student loans are consolidated, the borrower has to start repaying right away, losing the six-month grace period to repay after graduation. Behm recommended that a borrower utilize that grace period prior to consolidating student loans.

Cost accounting

Hernandez wants to obtain a master's degree, but the huge debt load she took on for her undergraduate degree could hamper that goal.

"It's frustrating. I need this education, but I have this debt, and it's so expensive to go back to school," she said.

Despite the short-term burden, it pays in the long run to keep up with your student loan payments, experts said.

Letting payments lapse or student loans go into default puts long-term blemishes on your credit history and hurts your chances down the road to take out a loan to buy a car or home.

"Make sure you make some payment. It definitely affects your credit history," PIRGs' Bannon said.

Uncle Sam will not pardon the student loans that you owe him.

"The biggest misconception is that the U.S. government will eventually forget about the debt. There's no statutory limit on this debt. You are not protected by bankruptcy," said Kim McGrigg, a spokesman for Money Management International, a nonprofit Houston-based firm that provides credit counseling.

In her case, Hernandez decided to stay with her family until her finances are in order.

"My asset to debt ratio is upside down right now," she said.

Copyright 2002 Reuters. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.