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Author: Davis, KristinKountze, Elizabeth

COLLEGE

THE CLASS OF '05 has it good. This spring's college graduates are enjoying the lowest student loan interest rates on record. If you act quickly, you can lock in those low rates for as long as it takes to repay your Stafford or PLUS loans. But miss the June 30 deadline for consolidating loans at current rates and you could wind up paying twice as much interest on your debt.

Stephanie Seek took advantage of this once-in-a-lifetime opportunity to lock in a 2.88% rate on $50,000 worth of Stafford loans. A third-year medical student at Georgetown University, she will probably borrow another $50,000 before she finishes. But in the 30 years allowed for repayment, she'll save more than $21,000 in interest on the first $50,000. Consolidation is "a wonderful money-management tool," says Seek, who is taking a year off from her studies to work as the legislative affairs director for the American Medical Student Association.

Rates are poised to jump as much as two percentage points this July 1 on variable-rate Stafford loans for students and PLUS loans for parents. Currently, the rate for Stafford borrowers is only 2.77% while in school and during a six-month grace period after graduation, then 3.37% until the loan is repaid. PLUS-loan borrowers currently pay 4.17%.

But students and parents who consolidate their loans before the rates rise can secure the current low rates for good. And because spring graduates who consolidate will be locking in during their six-month grace period, they'll get the lower grace-period rate rather than the regular repayment rate.

During her year off, Seek was able to take advantage of the grace-period rate, too. (Because consolidation rates are rounded up to the nearest one-eighth percentage point, the actual consolidation rates are 2.88% for those who consolidate Stafford loans during their grace period, 3.38% on Staffords consolidated after the grace period and 4.25% on PLUS loans.)

How much money might consolidation save you? Consolidate a $20,000 Stafford loan at 2.88% and you'll pay $110 per month, including about $6,300 in interest over 20 years. A student who misses the boat and consolidates after June 30 and after his or her grace period ends would pay 5.38% if rates rose two percentage points. That would double the interest cost, to about $12,700. A med-or law-school student with $125,000 in debt could see the cost of borrowing rise from about $61,700 in interest to about $127,000.

There's more: If you consolidate with a private lender and take advantage of payment incentives, you can cut your interest rate even further. Private lenders, such as Sallie Mae, Access Group and Citibank, knock one-fourth percentage point off your rate if you sign up to have payments automatically debited from a bank account; they'll reduce the rate by another point after 36 on-time payments. So after the third year, you could be paying a paltry 1.63%. And, yes, that's tax-deductible interest, cutting the real cost of borrowing even more. You can deduct up to $2,500 of student-loan interest each year, and this write-off is available whether or not you itemize deductions. The right to claim this deduction is phased out if your income exceeds $50,000 on a single return or $100,000 on a joint return.

Can you consolidate while you or your child is still in school? Houston dad Jerry Taylor did just that, locking in a 4.25%' rate on $18,000 worth of PLUS loans. He'll undoubtedly borrow more before his son, a sophomore at Dillard University in New Orleans, graduates. But he'll save money on at least a portion of his debt.

Stafford-loan borrowers can consolidate before graduation only in the federal government's direct-loan program, which means they must have at least one direct loan or be studying at a school in the direct-loan program. Borrowers who have loans only from private lenders in the Federal Family Education Loan program are out of luck. Locked out entirely are borrowers who have already consolidated. They can't consolidate again unless they have new education loans to fold in.

Make the most of this deal. Student-loan consolidation was originally meant to help students who needed payment relief. In order to generate lower payments, these loans have longer repayment terms than standard Stafford or PLUS loans. (A $20,000 loan comes with a 20-year repayment term, for instance.) That means you'll rack up more interest over the life of the loan. But there are ways to maximize your savings from the lower rates.

One way is to make larger payments than are required. There's no penalty for prepaying a student loan. Go to a payment calculator (such as the one at www.finaid.org/calculators) and figure out what your payment would be over ten years (or whatever amount of time is left on a loan already in repayment). Make that payment each month to avoid stretching out the debt.

Or, plan to make good use of the low-cost money. There aren't many places where you can borrow at a fixed rate of about 2% with tax-deductible interest. So if you take advantage of the super-low payment over 20 or 30 years, be diligent about using your extra cash flow to pay off higher-rate debt or to make contributions to a retirement or college-savings account.

PHOTO (COLOR): Med student Stephanie Seek will save $21,000 in interest by locking in a sub-3% rate on her student loans.

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By Kristin Davis

Research by Elizabeth Kountze