Rates on Stafford, PLUS loans for college students are falling

— -- Everybody loves a bargain. That's why some folks will travel 10 miles to save 50 cents on a gallon of milk. But if you need to borrow money for college, you don't have to drive across town to get a good deal on student loans. Starting next month, the cost of borrowing from the federal government using Stafford loans will drop for thousands of college students.

On July 1, the interest rate for new subsidized Stafford loans for undergraduate students will drop to 5.6% from the current rate of 6%. This rate, which applies to loans issued between July 1 and June 30, 2010, will remain in effect for the life of the loan. Subsidized Stafford loans are available for borrowers who demonstrate financial need.

The reduction is part of a series of rate cuts embedded in a $20 billion college aid bill signed into law in 2007. The lower rate won't affect loans issued before July 1, says Bob Murray, spokesman for USA Funds, the USA's largest student loan guarantor. "If you're an undergraduate with a subsidized loan and got it last year, the rate is 6% and will stay 6% for the life of the loan," he says.

Rates for new unsubsidized Stafford loans, which are available for all students, will remain at 6.8%. However, all Stafford borrowers will get a break on upfront borrower fees, Murray says. On July 1, the maximum fee that lenders will be permitted to charge on Stafford loans disbursed between July 1 and June 30, 2010, will drop to 1.5% from 2%. Upfront fees are deducted from the loan amount when the loan is disbursed.

Lower rate for old loans

If you have federal student loans issued before July 1, 2006, there's even better news. On July 1, the repayment rate on those loans will drop to 2.48% from the current rate of 4.21%. Interest rates on federal PLUS loans — Parent Loan for Undergraduate Students — issued before July 1, 2006, will drop to 3.28% from 5.01%.

Borrowers who consolidate these loans after July 1 will lock in a rate of 2.5% for the life of the loan. Borrowers who are in their grace period, the six-month interval between graduation and the start of repayments, can lock in a rate of 2%. PLUS loan borrowers who consolidate can lock in a rate of 3.38%.