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.
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