Thursday, May 30, 2002

Interest rate for
federal student loans
hits record low

The rate declines to 4.06%
on July 1, thanks to a recession

Staff and news reports

The cost of federal student loans is about to fall for most borrowers from already historic lows, the U.S. Education Department said.

On July 1, interest on government-backed student loans known as Stafford loans will automatically fall to 4.06 percent, from 5.99 percent. The rate on PLUS loans will drop to 4.86 percent, from 6.79 percent. Stafford loans are taken out by the student, while PLUS loans are taken out by parents.

The government estimates that if the new rate on the Stafford loans remained unchanged, student borrowers with a $10,000 balance would save $1,133 over the standard 10-year repayment plan.

At the University of Hawaii-Manoa, about 3,000 students received federal loans during the last academic year.

About 1,400 Chaminade University students took out federal loans during the last academic year, borrowing a total of about $13 million, said loan director Eric Nemoto.

Walt Fleming, associate vice president for student support services at Hawaii Pacific University, said the number of federal loans has increased with education costs.

"Probably around a couple thousand students were involved in student loans at the start of the fall term," he said.

Last year's rates were already the lowest since the student loan program began in 1965, with a rate of 7 percent.

The new rates are even lower than the fixed 5 percent charged on Perkins loans provided to the neediest students.

Stafford and PLUS loans are made on a variable rate reset each July, based on short-term interest rates the government sets after U.S. Treasury bills are auctioned at the end of May.

The new rate applies only to Stafford and PLUS loans disbursed on or after July 1, 1998.

But loans obtained before that could benefit from the lower rate if they are consolidated this year, said Sally Stroup, assistant secretary for postsecondary education.

Repayment of Stafford loans begins six months after graduation. PLUS loans are repaid immediately, like credit card debt.

Nearly 8,000 colleges, universities and vocational training schools may take part in the federal loan program. This year, 5.4 million students and parents borrowed an average of $3,945 in federal education loans, a total of $35.6 billion, education officials said. The rates are this low because of the Sept. 11 attacks and the recession, said John E. Dean, lobbyist for the Consumer Bankers Association.

But they are unlikely to last, or to compensate much for the climbing cost of a college degree. "People should not fool themselves that somehow college becoming less affordable has been solved," Dean said.

The Associated Press and Star-Bulletin reporter
Treena Shapiro contributed to this report.

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