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American Morning

Student Loan Rates Set to Drop

Aired May 28, 2002 - 08:20   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
PAULA ZAHN, CNN ANCHOR: 'Tis the season for graduation, and as college seniors across the country put on their caps and gowns, students and their families are getting an unexpected gift from Uncle Sam. The repayment rates on federal student loans are set to drop almost 2 percent today.

And joining us now to explain how you can benefit from that new deal, personal financial expert Terry Savage from the "Chicago Sun- Times."

Welcome back, Terry.

TERRY SAVAGE, "CHICAGO SUN-TIMES": Good morning, Paula.

ZAHN: Before we get to how people can take advantage of this new rate reduction, walk us through what the average student leaving a four year private college is carrying in terms of debt. Is it true it's about $17,000?

SAVAGE: And in many times, more than that, Paula. It just depends on the kind of financial aid you received. But if you were going to a private school, it could easily be double that, and graduate students may have much more debt. So it's like starting out life with a mortgage on your future. It was a good investment, college, but you do wind up with a lot of interest to pay over the years. And because of a quirk in the way the laws work in interest rates, we're about to get a great break. You might cut your interest rate on student loans literally in half.

ZAHN: So tell us how people can take advantage of this opportunity.

SAVAGE: All right. Well, here's what happens, and it actually doesn't start today, although the process starts now. But it starts as of July 1. Every year on July 1, the rates on student, federal student loans automatically are adjusted. That's based on the Treasury Bill rates set at the end of May, right now.

So we know -- it's no surprise to anyone that Treasury Bill rates have dropped, and for next year, it looks like the student loan rates for all outstanding loans automatically will drop starting July 1 to a little over 4.4 percent, maybe 4.1 percent. It's being announced in the next week or two. But students get a one-time chance to consolidate all their different student loans and lock in the rate for the life of their loan. And if they do that, that new rate, 4.1 percent, will hold for the rest of the time they pay their loans. That will be after July 1.

Now, there's a very special deal. For those just graduating who have student loans, there's a six-month grace period before you have to start repaying your loans. If you happen to lock in your loan rate -- for the life of your loan you only get one chance to do this -- you could actually drop the rate another 0.6 percent. You could lock in at 3.5 percent for your student loans and most lenders. If you agree to pay automatically, have them take it out of your checking account, they'll known another 0.25 percent off the rate, bringing you down to 3.25 percent.

You must do this after July 1. You have the whole year actually to do it. But you want to get started, especially if you're a new graduate; you must consolidate within six months to get that extra 0.6 percent.

So not only that, I can tell you one other thing: If you pay on time for five years, many lenders will knock an extra percentage point off five years down the road. So you could get the best deal ever, especially if the economy picks up and rates start to rise -- next year rates would go up again.

But I think it's a pretty good time to do that one-time-only consolidation.

ZAHN: Sure. And the percentages, you look at these graphics, make it quite clear the advantages you will have come July 1.

SAVAGE: Yes.

ZAHN: But help us understand, let's say, an average student who's taken out maybe a $20,000 college loan, what the savings will represent compared to no rate reduction.

SAVAGE: Well, on a $20,000 loan the savings could be about $20 or $25 a month in payments. That means a lot. It's thousands of dollars over the life of the loan. You know, the goal is to try and set, pay off your student loans within 10 years. There's no penalty for prepayment on a student loan, so if you get a job, hopefully you get a bonus or something, moving expenses that you don't use because you're still living at home, make double payments, and pay it off -- because 10 years from now you'll want to be debt free so that you can perhaps buy a house. Some time in there, you'll want to buy a car.

As I said, student loans are a good investment, but the lower rate means lower monthly payments by $20, $25, and it will give you a chance to pay off the loan faster.

ZAHN: Doesn't it also mean lower deductions when you come to file your taxes?

SAVAGE: Well, this is really interesting... ZAHN: Presumably, these kids will get jobs out of college, we hope.

SAVAGE: Yes, that's, this is not an easy year for that, as we're all seeing. This year, $2,500 of student loan interest is deductible -- of the interest. So you'll probably make a good dent in your income tax bill if you do have student loan interest. That's for people who are single and have under $50,000 income or are married with $100,000 income.

So the government has really been very supportive of getting people to go through college, take out those loans. Now you have this interest rate option that lets you lock in much lower rates, and it's a good deal.

ZAHN: Well, Terry Savage, thank you for taking us through the process this morning. We appreciate it.

SAVAGE: Just remember, after July 1 -- don't consolidate before.

ZAHN: All right. Very good.

And we wish all of you luck who are going to be following this advice, and congratulations and glad to hear you're going to...

SAVAGE: A graduation present.

ZAHN: Yes, really. Congratulations on the graduation; congratulations on saving a little dough here.

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