Deadline Approaches for Low-Rate Student Loans Michele Norris talks with Steven Burd of The Chronicle of Higher Education about locking in and consolidating student loans. July 1, 2006 is the last day for college students and recent graduates to lock in their current loan rate before what is expected to be a sharp interest-rate increase. Burd explains the impact on students and loan companies.
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Deadline Approaches for Low-Rate Student Loans

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Deadline Approaches for Low-Rate Student Loans

Deadline Approaches for Low-Rate Student Loans

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From NPR News, this is ALL THINGS CONSIDERED. I'm Melissa Block.


And I'm Michele Norris.

College students and recent grads are rushing to refinance their student loans in advance of an important deadline, July 1st. After that date, students could face a sharp increase in the interest they pay on their loans. That increase could mean thousands of dollars over the course of the loan.

Steven Burd is a reporter with the Chronicle of Higher Education and he joins me now to talk about all this. Steven, explain briefly what happens after July 1st.

Mr. STEVEN BURD (Chronicle of Higher Education): After July 1st, the interest rate on existing student loans will increase to 7.1 percent and the interest rate on new loans, loans that are going to be originated after July 1st, will be a fixed rate of 6.8 percent.

The rate had previously been 5.3 percent. So it's a fairly dramatic increase. In fact, I believe it's one of the largest single year increases in the history of the student loan program.

NORRIS: And why the increase? And why July 1st?

Mr. BURD: Every year there's an auction of treasury bills that is done in May and that sets the interest rate and it goes into effect on July 1st. So that's typical. The reason why the increase is so steep this year is because the Federal Reserve has been increasing interest rates all year long. The interest rate on existing loans is a variable rate that is affected by the prevailing rates in the country.

NORRIS: So they're trying to lock in a rate to prevent an increase, and actually, the interest rate could continue to increase beyond that 6.8 percent.

Mr. BURD: Yes. But the interest rate - when students consolidate their loans now, if they consolidate before July 1st, then they'll be able to pay around 5.3. After that it will be about 6.8 percent. It'll be a fixed rate so it won't go higher.

NORRIS: Will it be harder to consolidate after July 1st?

Mr. BURD: Well, it won't be necessarily harder to consolidate. They'll just have, their rates won't be as good. There's sort of a last-minute flurry because this is really the last time because of the new fixed rates that students will be able to get these kind of bargains.

It's estimated that on $20,000 in debt, a student who consolidates now will save about $2,300. So if they consolidate before Saturday, or before July 1st, they will be able to save that $2,300.

NORRIS: Now this flurry of activity, this rush to refinance - there are stories about phones ringing off the hook in lending offices. What's going on in the industry?

Mr. BURD: People call it the refinancing frenzy. Basically there're a bunch of companies, all the student loan companies are really aggressively marketing consolidation loans. There are a lot of complaints that some of the companies are engaging in overly aggressive and misleading sales pitches.

One company was sending out checks to students worth hundreds of dollars that they can cash if they make at least one consolidation payment on their loans. And a lot of people think that was illegal inducement.

NORRIS: Well time is a-ticking. There's really not much time left to make any kind of decision. But for those who are still sitting on the fence, any advice for people are receiving all these missives from the lending industry?

Mr. BURD: Well it's definitely a confusing time for a lot of students. They're getting letters in the mail from various companies. And they all say consolidate now or you'll really lose out. But student aid experts also say that students should be pretty careful before they consolidate just to make sure of what they doing.

Because in some cases, they can lose some of the benefits on their loans when they consolidate. Such as people who are getting loan forgiveness to be teachers could lose that. I believe they could also lose the six-month grace period that borrowers have before they have to start repaying their loans.

NORRIS: So you consolidate and you lock in that low rate, but you got to start to paying that loan back immediately after graduation?

Mr. BURD: Yes. Right.

NORRIS: Steven Burd, thanks so much for explaining all this for us.

Mr. BURD: Thank you very much.

NORRIS: Steven Burd is a reporter with the Chronicle of Higher Education.

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