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Mixed Feelings on Future of Student Loans

June 3, 2008

by Scholarships.com Staff

Students who took out Stafford Loans shortly before July 1, 2006 may have fumed upon finding that rates would be fixed for future lenders. Those repaying older, variable-rate loans during the 2007-2008 school year were stuck with a 7.22% interest rate (6.62% during in-school or grace periods) while those whose student loans were disbursed after July 1, 2006 were secure knowing their annual rates would not exceed 6.8%. 

Well, the tables may be turning. During the 2008-2009 school year, interest rates on variable loans will be cut to 4.21% (3.61% during in-school and grace periods) while fixed rates will barely budge. For those with fixed loans first disbursed between the July 1, 2006 and June 30, 2008, these changes will be meaningless--their annual 6.8% rate will still apply. Those whose loans are first disbursed this year may get a bit of a break with the new 6.0% fixed rate (which only applies to undergraduates), but that’s a bittersweet consolation when one considers the larger variable rate cuts and the quickly rising college costs.

Luckily, the future is not completely sour for students with fixed-rate loans. Those who are able to hold off borrowing for a few more years may benefit from doing so. That's because interest rates on fixed loans will gradually fall over the next few years. Understandably, not everyone can afford to hold off. This being said, those who can should.

By 2011, the interest rates on fixed loans are expected to drop to 3.4%. Students who can't wait that long can still save money by waiting for at least one more year. Undergraduates who take out a Stafford Loan between July 2009 and July 2010 will be paying a fixed rate of 5.6%. That's certainly better than 6.8% or the upcoming 6.0%.

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