The government has good news for students and parents borrowing money to pay the rising cost of a college education: Interest rates on student loans are falling July 1. In addition to reducing payments, the change presents an opportunity for many former students to consolidate their education debt and lock in historically low rates.
Rates on Stafford loans, the most common student loan, will fall to their lowest level in decades - 3.37 percent if the loans are in repayment and 2.77 percent if the borrowers are still in school. Parents who have PLUS loans will pay 4.17 percent.
Rates are set by a formula tied to the interest rate on the 91-day Treasury bill. The new rates are just a fraction lower than current rates, but down dramatically from three years ago when Stafford borrowers were paying 5.99 percent. That's a difference of $1,523 in interest over 10 years on a $10,000 loan.
Many students owe far more by the time they graduate. At four-year public colleges, the average loan in 2000 was $5,300. About half the students from lower-income and middle-income families took out loans, according to the National Center for Education Statistics.
Loan rates adjust every year unless the borrower decides to "consolidate," which means locking in a fixed rate on one loan or on several that can be refinanced as a single loan. The predicament facing borrowers is that a loan can be consolidated only once. Those who went through the process three years ago locked in higher rates to their regret.
Borrowers who are eligible to consolidate have a full year to take advantage of the new rates, unless Congress passes proposed legislation that would eliminate fixed-rate loans.
Recent graduates have an incentive to act earlier. If they consolidate during the first six months after graduation, they get an even lower rate on their loan.
If you are considering consolidation, shop around for a lender. Many offer incentives such as lower rates for people who sign up for automatic payments or who make a certain number of payments on time.
If you have a Perkins loan, you may not want to consolidate it with other student loans since you would lose its special benefits, including the potential for forgiveness for military service or teaching in a low-income school.
If you consolidate, you may have the option of extending your repayment period, reducing your payment. That's good if it allows you to put more resources toward paying off high-interest debt such as credit cards. However, it carries a cost since your loans may not be paid off by the time your children are ready for college.
Q. My broker asked me to sell one stock and buy another, which I agreed to do. He sold my stock and the money is sitting in my account. It was one whole month before I heard from him. He explained the new stock has not been issued yet and when it comes they will send me a statement. Is this legal? Can he sell something before it has been issued?
You have a communication problem, not a legal problem. Your broker should have done a better job of explaining the timing involved, including the possibility that a new stock offering could be delayed, which may have happened. Since the money is still sitting in your account, no sale has taken place.
Incidentally, some securities are actually bought and sold before they are issued. This is referred to as trading on a "when issued" basis. However, that probably does not apply in your situation.
Q. I have been told that giving a $10,000 gift annuity to a school could qualify me for a lifetime payment of about 7 percent a year and a one-year tax savings of about $3,500. How does this work? Is it a tax deduction and if so, how do you list it on your form 1040?
This is a charitable deduction, reducing your taxable income by $3,500. Your tax savings is a percentage of that, based on your tax bracket. This would be listed on your 1040 as part of your charitable deductions when you itemize. If you did not itemize, you would not get the deduction.
"You may want to warn your readers about a scam that I have observed recently. In checking my Visa bills against my restaurant receipts, I have found four cases of overbilling between $2 and $6 from four different restaurants. Apparently some waiters increased the tip amounts when they had control of the receipts. I had no problem getting refunds."
- Helen Huntley writes about investing and markets for the Times. If you have a question about investments or personal finance, send it to On Money. We'll try to answer those we think are of greatest reader interest. All questions must be submitted in writing, but readers' names will not be published. Send questions to firstname.lastname@example.org or Helen Huntley, Times, P.O. Box 1121, St. Petersburg, FL 33731.