(MONEY Magazine) – Interest rates on federal student loans are dropping dramatically on July 1, giving new borrowers, as well as those already repaying loans, a great chance to lock in a low rate--the lowest since today's variable-rate formula was set in 1992. Rates on Stafford Loans are adjusted every July 1 based on the last 91-day Treasury bill auction in May. Given recent T-bill rates, the student-loan rate is expected to fall to 4% to 4.5%, down sharply from last year's 5.99%. If you consolidate your federal loans after July 1, you'll lock in that rate for the remainder of your loan. (Or close to it: Your new fixed rate will be the weighted average of the variable rates on all your federal loans, including PLUS loans, rounded up to the nearest one-eighth percent.) Recent graduates can lock in a rate that's another 0.6% lower by consolidating before the end of their six-month repayment grace period, which would mean a rate of 3.5% to 4%. If you are currently deferring a loan, you also may be eligible for that break.

When you consolidate loans--which is most often a strategy for cutting high monthly payments--you'll face a choice of repayment methods and terms (up to 30 years). But if your goal is to cut your total interest costs, pick the shortest term you can afford. For more info, check with lender Sallie Mae (800-448-3533; www.salliemae.com) or the education department's site (www.loanconsolidation.ed.gov).

--TARA KALWARSKI