Summary: Q&A - Interest Rate on Direct Consolidation Loans
Author: ODAS - Office of the Deputy Assistant Secretary - SFA
Posted July 8, 1998
Student Loan Consolidation Interest Rates
July 7, 1998
Note: The questions and answers in this document describe current law. Congress is considering a number of changes in the student aid programs and is expected to pass legislation before October 1, 1998. The Department of Educations web site (www.ed.gov) will be updated to reflect any legislative change.
INTEREST RATE ON DIRECT CONSOLIDATION LOANS
What is the interest rate on new consolidation loans through the Direct Loan program on or after July 1st?
During repayment, new student consolidation loans made under the Direct Loan program on or after July 1 will get an interest rate of 7.46 percent. During the grace, deferment, or in-school periods, these loans will have an interest rate of 6.86 percent.
New consolidation PLUS loans for parents made under the Direct Loan program on or after July 1 will have an interest rate of 8.26 percent.
How is this interest rate calculated?
The interest rate is re-computed annually based upon certain formulas. While the interest rate varies annually, the formulas will not change over the life of the loan.
The interest rate for student direct consolidation loans is equal to the average 91-day Treasury bill rate plus 2.3 percentage points, with a maximum rate of 8.25 percent. During grace, deferment, or in-school periods, the rate is reduced to the average 91-day Treasury bill rate plus 1.7 percent, with a maximum rate of 8.25 percent.
The interest rate for PLUS direct consolidation loans is equal to the average 91-day Treasury bill rate plus 3.1 percentage points, with a maximum rate of 9 percent.
Why is the interest rate on direct consolidation loans dropping on July 1?
The interest rate on new consolidation loans through the Direct Loan program is dropping on July 1 to match the interest rates on new student loans. Congress scheduled an interest rate reduction on new student loans for July 1, 1998, as part of the Student Loan Reform Act of 1993 and later modified the interest rate provision through the Transportation Equity Act for the 21st Century this year.
Therefore, consistent with longstanding Department policy and regulations, the interest rate on direct consolidation loans has been reduced to match the interest rate on new student loans.
How much money will I save as a result of the new interest rate?
Each students savings will vary, depending on the size of the loan and how long he or she takes to repay it. Under the new interest rate, however, students will save about $50 per $1,000 borrowed over the life of their loans. An average student, who consolidates close to $19,000 of loans, will save nearly $1,000 over the standard ten-year loan.
If I have already received a loan consolidation through the Direct Loan program, do I need to re-apply to get the new, lower interest rate?
Yes. This interest rate change applies only to new consolidation loans and does not affect existing consolidation loans. If you have previously received a direct loan consolidation, you must apply to re-consolidate in order to receive this new, lower interest rate.
If you wish to refinance your direct consolidation loan, please call the Direct Loan program at 1-800-557-7392.
If I have a pending application for a loan consolidation through the Direct Loan program, do I need to re-apply to get the new, lower interest rate?
No. You will receive this new low interest rate without submitting a new application if your application is pending as of July 1. However, if you have received a "welcome letter" from the Direct Loan program dated before July 1, you already have a direct consolidation loan and will need to re-apply to get the lower rate.
If you are interested in re-applying, please call the Direct Loan program at 1-800-557-7392.
Is this new loan rate on direct consolidation loans permanent?
Under current law and interest rate projections, the rate will remain at or near this new level. However, Congress is considering a number of changes in the student aid programs and is expected to act before October 1. The Clinton Administration has recommended that the low rate for direct consolidation loans be continued and the interest rate on new FFEL consolidation loans be reduced to the same level.
INTEREST RATE ON FFEL (GOVERNMENT-GUARANTEED) CONSOLIDATION LOANS
Do I need to consolidate my FFEL loans in order to get this rate?
No, not necessarily. If you have FFEL loans made prior to July 1, they likely carry a higher interest rate than loans now available. While your lender is not required to offer the new rate on loans made prior to July 1, it may choose to do so.
Why isnt the interest rate on FFEL consolidation loans dropping?
The maximum interest rate on FFEL consolidation loans is set by statute. Although President Clinton signed a new law in June which changed the interest rate on new student loans in both the Direct Loan and FFEL programs, the law did not affect FFEL consolidation loans.
APPLYING FOR A DIRECT LOAN CONSOLIDATION
Whom should I contact to receive the new direct consolidation loan interest rate? Where can I get an application?
To apply for a loan consolidation through the Direct Loan program, please call the Direct Loan program at 1-800-557-7392 and ask for an application to be mailed to you.
How long will it take to process my consolidation application?
Loan consolidation is a lengthy process, largely because each of your lenders must respond to our request to verify your loan balance. The industry standard is 60 to 90 days.
The lower interest rates for new direct consolidation loans may result in increased demand for loan consolidations. We have expanded processing capacity to handle an increased volume of requests. If the demand for consolidations exceeds expectations, it may temporarily take longer than usual to process applications. However, if you apply now, you will receive the new, low interest rate.
If I consolidate, do I have to extend the number of years over which I repay my loan?
No, but this is an option. After consolidating your loans, the Direct Loan program calculates your monthly payments as if you were to take the full term to repay the loan. However, you always have the ability to repay your loan early.