NEW YORK (CNN/Money) - Interest rates on some federal education loans are headed to all-time lows. That's good news for your wallet if you're saddled with debt from college or graduate school.

According to Sallie Mae, which owns or manages student loans for more than 7 million borrowers, the new repayment rate for student Stafford loans will be set on July 1 at 4.06 percent. That's nearly two percentage points less than it has been for the past year.

The new rate for PLUS loans, which are given to parents, will be 4.86 percent, down from 6.79 percent in the past year. The rates were determined by Tuesday's Treasury bill auction. (The Department of Education is expected to report the official rates by the end of the week.)

As a result, if you have one of these variable-rate loans, you'll automatically owe less money for the next year. But you may benefit even more if you consolidate your student loans at the new rates, which will be in effect for a 12-month period through June 30, 2003. (Rates are set every year on July 1.)

The beauty of consolidation is that you lock in one fixed rate that is based on an average of your loans' current rates. That way you no longer worry about paying more when interest rates climb, which is an inherent risk of variable-rate loans such as the Stafford or PLUS.

Generally speaking, people consolidate their student loans for one of two reasons: To lower their monthly payments or to save money over time. Each has its pros and cons, and only you can judge what's best for you.

PAYING BACK STUDENT LOANS       • Average remaining student loan balance (men, 21-34): $12,900 • Average monthly payment (men, 21-34): $222 • Average remaining student loan balance (women, 21-34): $10,300 • Average monthly payment (women, 21-34): $141 Source: Collegiate Funding Services survey

If you want to significantly lower your monthly payments, you often can do so by extending your repayment period well past the 10-year term typical for federal student loans. Doing so, however, means you will pay more in interest in the long run since you will be making payments over a greater length of time.

In terms of providing immediate payment relief, however, "loan consolidation can be a really good debt management tool," said Martha Holler, a senior director at Sallie Mae.

If your goal is to save money over the long haul, locking in a low interest rate now without lengthening your repayment period is the way to go. The sooner you pay off your loan, the more you save. You're even free to pay more than the required monthly amount if you wish. That's because with consolidated federal loans, "there is no prepayment penalty," Holler said. One possible drawback to this option: your monthly payments may be the same or even higher than they were before consolidation.

If you had been thinking about consolidating, "you'd have to be crazy to do so" before the new rates take effect July 1, said Kalman A. Chany, author of Paying for College Without Going Broke.

WHERE TO GO       Federal loans may be consolidated through any federally approved private lender such as Sallie Mae or the Student Loan Consolidation Center. Direct Loans from the government may be consolidated through a federally approved private lender or the Department of Education.

That's because doing so today means you may be given the higher rates currently in effect. Some consolidators, however, such as Collegiate Funding Services and Sallie Mae, will allow you to apply for consolidation now and have it take effect on July 1 or any other date you specify.

Still, that doesn't necessarily mean everyone needs to rush out and have their consolidation in place come July. In some situations, it may pay to wait a bit, Chany said.

For instance, if you're a current student or a recent grad with Stafford loans, you enjoy an "in-school" interest rate that is 0.6 percent less than the repayment rate and you're given a six-month grace period following graduation during which you are not obligated to start repayment. Once the new rates take effect July 1, the in-school rate will be 3.46 percent. Consolidating at the in-school rate is highly advantageous, but once you consolidate you must begin making payments immediately. So it may be smart to have your consolidation take effect at the end of your grace period or by June 30, 2003, whichever is sooner.

In addition to interest rates, there are other factors to consider before consolidating. "Look and see if you're foregoing any benefits," Chany said.

For instance, if you make 48 consecutive on-time payments on your original loans you may qualify for a rate discount up to two percentage points. So if you're on the cusp of qualifying, do the math: it may make sense to stick with the loans you've got. Or, if you're already enjoying various benefits and want to maximize them and still lock in a historically low rate on your debt, you might wait until next spring to consolidate. Just be sure you leave a one-to-two month window for your consolidation application to go through, and be sure it's a done deal by June 30, 2003.

When shopping for a consolidation loan, be sure to ask what benefits are offered. Lenders, for instance, may offer a rate discount of a quarter of a percentage point if electronic payments are made directly from your bank account. That's what Sallie Mae is offering borrowers who consolidate after July 1. In addition, those consolidating at least $10,000 worth of loans will get a 1 percent discount if they make 48 consecutive on-time payments.

RELATED SITES       • Federal Direct Consolidation Loans • Sallie Mae • Collegiate Funding Services • Student Loan Consolidation Center • FinAid.org

You should also be selective about which federal loans you consolidate. Your consolidated interest rate is based on a weighted average of the interest rates on your current loans, rounded up to the nearest one eighth of a percent but capped at 8.25 percent. If your highest-rate loan has a small balance, you might be better off not including it since it will raise the weighted average of your consolidated rate, Chany said.

The bottom line is, there is no one right answer for everyone when it comes to consolidation. You have to weigh your financial needs with the repayment options available to you. "It's not a one-size fits all," Chany said. "You really have to do your homework."

For help in figuring out whether a loan consolidation makes financial sense for you, use the U.S. Department of Education's Direct Loan Consolidation calculator or Sallie Mae's repayment estimator.