Interest rates on University students’ federally funded loans will drop 2.2 percent after July 1.

The interest rates are aligned with the latest three-month Treasury bill rate, set by the Treasury Department.

“We anticipate, here at the University of Minnesota, that 30,000 students taking out loans will be affected by this interest rate change,” said Nancy Sinsabaugh, the interim director of student finance at the University.

Students become eligible for federal loans by filling out the Free Application for Federal Student Aid. The government determines the loan amount based on student need.

Kim Koch, a student in the College of Biological Sciences, admits she doesn’t know much about her financial aid or the exact loans she receives. But she is enthusiastic that interest rates are dropping.

“I think it’s a good thing that loan rates are dropping so students can afford to pay for school,” Koch said.

In light of expected tuition increases, federal aid will become more important to students, and the decreased interest rate will make aid more appealing as well.

The majority of students at the University receive federal student loans through the Ford Direct Loan Program. These loans have a variable interest rate that is adjusted annually.

The lowered interest rates apply automatically to loans received after July 1, 1998.

“For borrowers with previous subsidized loans, the interest rate will be dropping from 8.19 percent to the new rate of 5.99 percent,” said Dan Reyelts, the vice president who manages the education and loan department at TCF Bank in Minneapolis.

For borrowers with unsubsidized loans, interest rates will drop from 7.99 percent to 5.39 percent, Reyelts said.

Students with unsubsidized loans are required to pay interest, while subsidized loans are interest-free during enrollment in a secondary education institution. These new interest rates will have no affect on students who receive subsidized loans.

“Borrowers don’t need to do anything to benefit from this lower interest rate,” said Reyelts. “These lower rates will take affect automatically on their loans.”

Reyelts said graduate and post-graduate students should take advantage of the lower interest rates and consolidate their loans. It is to their advantage to consolidate through the Federal Consolidation Program, he added.

Through the FCP, students can pay off different federal loans by combining them into one big loan and extending the term up to 25 years. The program offers a fixed interest rate that the student will be locked into until they finish
paying off the loan.

Reyelts said students should consolidate their loans while the interest rates are lower – although it is not always the best solution.

“If the student is used to making a payment of, say, $100 a month, now since the interest rates are dropping their lender will say you only have to send in $80 a month. But I would keep sending the $100 and keep paying the higher amount, as it will reduce the principal faster and save money in the long run,” Reyelts said.

The longer students spend paying off loans, the more interest they will pay. Reyelts recommends making monthly payment in excess of the set payment, if possible, to decrease the amount of interest paid.

Students should contact their lenders to receive specific information on the correct procedure to take advantage of the lower interest rates on their individual loans.

Anne Preller covers student life and welcomes comments at [email protected]