If you still have federal student loans that were disbursed between July 1, 1998 and June 30, 2006 that you haven't paid off yet and haven't consolidated, you just won the student loan interest rate lottery.

The Good News
The stars have aligned and that the federal government has set its interest rate on variable-rate federal loans in this time period at 1.88% if you are still in school or in your grace period and at 2.48% if you are in repayment.

But what does it mean to you in the grand scheme of your student loans? Every year on July 1, the federal government sets its interest rates for student loan borrowing for the year. So the rate that is valid on July 1 is valid until June 30 the following year.

Fixed or Variable?
Loans disbursed since June 30 2006 have a fixed interest rate based on what the federal government set the student loan borrowing rate at that particular year but any loans before that vary on an annual basis.

So what should you do? Consolidate, consolidate, consolidate. If you call up direct lending or your current servicer, lock in this incredibly low rate until you've completely paid off your student loans. Once you've consolidated, your rate is fixed permanently.

However, the rates of 1.88% and 2.48% will only be on loans from this time period. Consolidation for loans issued before July 1, 1998 or after June 30, 2006 will carry the rate assigned to their time period.

How It Works
For example: You have $20,000 in loans at 1.88%. Then you add in a loan from last spring at 6% for $5,000. To calculate your weighted average divide each loan amount by the total amount of your loans, then multiply it by the corresponding interest rate.

In this case, the calculation is ($20,000/$25,000)1.88% + ($5,000/$25,000) = 2.7%. Thus, your weighted average of your loan will be 2.7%, and this is the rate on your consolidation loan. (To learn more ways to help reduce your debt, read Shuffle Away Your Debt With Balance Transfers.)

Now, let's say you didn't consolidate, and loans from July 1, 1998 to June 30, 2006 went up just a couple of percentage points to 4% next year. You would then pay double the amount of interest on your loan.

The Bottom Line
Who knows when loan rates will ever be this low again, so grab it now and keep your money for more fun pursuits than interest payments.

For more on dealing with your post-graduation debt check out Should You Consolidate Your Student Loans? and Debunking 10 Budget Myths.

Follow us on Twitter

Related Articles
  1. Insurance

    5 Ways to Lower Life Insurance Premiums

    Learn several effective methods for lowering life insurance premiums. These include quitting smoking and considering term life insurance.
  2. Budgeting

    The 7 Best Ways to Get Out of Debt

    Obtain information on how to put together and execute a plan to get out of debt, including the various steps and methods people use to become debt-free.
  3. Personal Finance

    How To Get That Entry-Level Financial Analyst Job

    Landing a job as a financial analyst takes study, strategy and a lot of hard work. Here's how to hone your competitive edge.
  4. Personal Finance

    Does It Make Sense to Go to College in Europe?

    If you're deciding whether to get a degree abroad, first do your research and talk to alumni who have completed the same program.
  5. Home & Auto

    4 Areas to Consider Roofing Material Types

    Roofing your home is very important, that’s why you should choose a roof specifically designed to handle your area’s climate.
  6. Savings

    6 Ways to Save Money on College Supplies

    Tuition and room and board are big expenses, yes, but the cost of textbooks and supplies can add up, too, unless you strategize.
  7. Professionals

    Is it Time to (Finally) Push Kids Out of the Nest?

    Parents should make sure their kids realize their home is a launching pad not a landing spot, and advisors can help clients talk to their children.
  8. Credit & Loans

    Four Ways to Improve Education In America

    U.S. students place 27th in math and 20th in science out of 34 countries. The United States must reform its education system or harm future economic productivity and global trade competitiveness.
  9. Savings

    A Look at the Cost and Tax Treatment of College

    Is there more we can do to improve the affordability of post-secondary education? We take a look at how students and colleges are taxed today.
  10. Professionals

    10 Must-Follow Broker-Dealers on Social Media

    Stay in the financial markets 'know' by following these influential independent broker-dealers on social media.
RELATED TERMS
  1. Cost Accounting

    A type of accounting process that aims to capture a company's ...
  2. Internal Rate Of Return - IRR

    A metric used in capital budgeting measuring the profitability ...
  3. Venture Capitalist

    An investor who either provides capital to startup ventures or ...
  4. Good Student Discount

    An auto insurance policy discount available to young drivers ...
  5. Whartonite

    A graduate of the Wharton School of Business at the University ...
  6. Free Application For Federal Student ...

    The form that must be completed in order to qualify for any type ...
RELATED FAQS
  1. Can my IRA be used for college tuition?

    You can use your IRA to pay for college tuition even before you reach retirement age. In fact, your retirement savings can ... Read Full Answer >>
  2. How does a bank determine what my discretionary income is when making a loan decision?

    Discretionary income is the money left over from your gross income each month after taking out taxes and paying for necessities. ... Read Full Answer >>
  3. What is the range of deductibles offered with various health insurance plans?

    A wide range of possible deductibles are available with health insurance plans, starting as low as a few hundred dollars ... Read Full Answer >>
  4. How do I know how much of my income should be discretionary?

    While there is no hard rule for how much of a person's income should be discretionary, Inc. magazine points out that it would ... Read Full Answer >>
  5. What proportion of my income should I put into my demand deposit account?

    Generally speaking, aim to keep between two months and six months worth of your fixed expenses in your demand deposit accounts. ... Read Full Answer >>
  6. What are the long-term effects of delinquent accounts?

    Delinquency occurs when borrowers fail to make payments on their loans. All loan borrowers should do their best to avoid ... Read Full Answer >>

You May Also Like

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!