NEW YORK (CNN/Money) – Many Fed watchers anticipate a rate hike by summer and a gradual rising of rates in areas that directly affect consumers. But in at least one rate-sensitive area, interest rates will be setting yet another record low.
Interest rates for federally guaranteed, variable-rate student loans that were issued after July 1,1998 will drop 0.05 percent, based on the results of Monday's auction of the 91-day Treasury bill to which the rates are tied.
So, for the period beginning July 1 through June 30 of next year, Stafford loan rates will drop to 2.77 percent from the current rate of 2.82 percent for those borrowers still in school, in their grace periods (that is, within 6 months after graduation) or in deferment. For borrowers in the repayment phase, their rate will drop to 3.37 percent from 3.42 percent.
Rates on Parent Loans for Undergraduate Students (PLUS), meanwhile, will fall to 4.17 percent from today's 4.22 percent.
(For a look at the interest rates for loans issued before July 1998, click here.)
What does it mean to me?
Consumers with variable-rate student loan debt will see the effects of the changes in their monthly payments starting July 1.
If you were thinking about consolidating your education loans, you should consider the pros and cons to see if such a move makes sense for you.
Besides allowing you to pay one bill every month instead of several, loan consolidation, which is free, can help you do one of two things.
You can save money over time by combining all your loans into one and locking in a fixed rate for your total debt. The rate is a weighted average of all your loans' rates rounded up to the nearest 1/8 of a percent.
Or you can lower your monthly payment by extending the term over which the debt is repaid. (You're likely to pay more in interest over time with this second option, but you can reduce that amount by prepaying on the loan at any time, penalty-free.)
Still, consolidation is not a no-brainer decision. You have to weigh what kinds of benefits you'd receive in exchange for any you'd forfeit, such as interest-rate discounts for prompt repayment, loan forgiveness provisions, or the ability to enjoy the full 6-month grace period after graduation before repayment must begin.
(To see how much various loan discounts can save you, use this calculator from FinAid.org.)
How will the new rates affect consolidation loans?
Since the drop in rates is slight, it only will have a muted effect on borrowers who choose to consolidate their education loans.
For borrowers interested in consolidating their Stafford loans in the grace period or in deferment, they can do so at the same 2.875 percent currently in effect, according to Sallie Mae, one of the country's largest providers of education funding.
If the Stafford loans are currently in repayment, borrowers can consolidate at a lower rate – 3.375 percent – than the one on tap now.
PLUS loans, meanwhile, can be consolidated at 4.25 percent, the same rate now on the books.
When should I consolidate?
Normally, you need to time your consolidation to occur before July 1 if rates are set to rise thereafter.
But that's not really a concern this year, since none of the consolidation rates going into effect July 1 will be higher than those currently in effect. So there's no rush.
The only exception is if you graduated in December and your grace period is about to run out, Kantrowitz said. Since the grace period consolidation rate is always lower than the repayment rate, it may make sense to lock that lower rate in now.
But if you have Stafford loans in repayment you might wish to wait until after July 1 since the consolidation rate will be down a bit. But some lenders may give you the most advantageous rate available – either pre- or post-July 1. Sallie Mae is one, so long as the company has your signed application in hand by June 30.
And unlike some lenders, Sallie Mae will also allow recent grads to consolidate at the best rate available this year without forfeiting their grace period.
(For more, check the company's site dedicated to loan consolidation – SmartLoan.com.)
If all your loans are with one lender, you have to consolidate with that lender. If you have loans from more than one lender you're free to consolidate with any lender. So pick the one offering you the best deal. (Here's a loan-comparison calculator that can help.)
Anyone who thinks consolidation would be advantageous should certainly do so in the next 12 months. Rates will stay low until June 2005, but they aren't likely to stay low beyond that.
"A year from now (rates) are definitely going to go up," Kantrowitz said. "You want to consolidate before next year in any case."
Editor's note: This article, originally published May 11, has been updated.