(MONEY Magazine) – In May, we advised college kids and their parents to hold off applying for a student loan until the summer, when rates would drop. Following our advice would have paid off: In June, President Clinton signed a law changing the formula lenders use to calculate the annual interest rate on federal college loans. So since July 1, when the law went into effect, those rates have been at their lowest levels in four years.

Under the new formula, for example, unsubsidized Stafford Loans for the coming semester--which are available from private lenders and the Department of Education (800-433-3243)--will have a 6.86% rate while you're in school, down from 7.66% if you had borrowed before July 1.

As was the case before this change, rates on federally backed loans adjust annually. (Since the rate is pegged to a short-term Treasury bill, however, annual rate swings should be mild. Plus, the rate cannot exceed 8.25%.)

When you graduate and start repaying the loan, the rate goes up. Under the latest formula, recent grads will still come out ahead on new loans. Say you borrow this summer for your final semester and graduate in December. Your rate will rise to just 7.46%, more than three-quarters of a percentage point less than the 8.25% you would have faced under the old law.

As we went to press, Congress was still debating the rate formula for consolidated loans. Until lawmakers decide, grads who want to merge their loans will pay as much as 8.25%.

--Kelly Smith