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Enjoy student loan rates this low while they last

Gail MarksJarvis

5:29 PM EDT, August 16, 2013

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College students this year will get relief on federal student loans.

Interest charges will be lower than planned a few months ago, and lower than many students and their parents have been paying the last few years.

So enjoy, because this is a one-time deal. If you have to borrow again for your education after this school year, the loans you take on will probably cost you more.

For the 2013-14 school year, undergraduates will be entitled to federal Stafford loans with 3.86 percent interest rates. That's significantly better than the 6.8 percent that was planned for students from middle-income families before Congress argued for weeks about what to charge.

For parents, PLUS loans will charge 6.4 percent interest this year, while graduate students can get Stafford loans at 5.4 percent or graduate loans at 6.4 percent. Those lower rates are a reprieve from the significantly higher 7.9 percent rates that graduate students and parents faced prior to this one-time deal.

Students and parents have been getting gouged with interest rates close to 8 percent at a most unlikely time. After all, there's been heavy rhetoric the last few years about the need to build up a more educated workforce, and the weak economy left non-education interest rates near the lowest levels in history. Homebuyers were able to get 30-year mortgages under 4 percent a few months ago, and although rates are higher now, mortgages still are under 5 percent.

As the House and Senate debated college loan rates, the Congressional Budget Office reported that the student loan program would help "produce savings that reduce the deficit." Yes, you read that right. Amid all the gnashing of teeth about the future of the nation's middle class and economy, student loan money has been envisioned as a way to reduce the nation's deficit.

The good news for students and parents borrowing money for college this year will be the fact that the interest rate will stay at 3.8 percent during the 10 years you have to pay off the loan. Each year, however, new loans can be fixed at higher rates than this year's. The rates will be set based on what is happening with rates on U.S. Treasury bonds. And since those rates have been extraordinarily low, but rising lately, future college loans probably won't carry interest rates as low.

There is, however, some protection for students and parents to ensure against crippling rates. Caps have been set so interest rates on undergraduate Stafford loans do not exceed 8.25 percent, graduate Stafford loans won't go above 9.5 percent, and other graduate and parent PLUS loans aren't over 10.5 percent.

The possibility of higher rates presents decisions for families. If a student is just starting the freshman year, and a parent plans to help pay for college with some savings and also by taking on federal parent PLUS loans, this could be the year to borrow the maximum and cut back in future years.

Yet, making the decision isn't easy, and it's essential to run the numbers, notes Mark Kantrowitz, publisher of Edvisors Network. Judging where interest rates are likely to go is very difficult, even for the pros that run bond funds. If a person borrows heavily for college during the first year of college, Kantrowitz said, he will be responsible for paying interest on those loans starting this year instead of three years from now. So while the interest rate might be lower this year than two or three years from now, total interest charges can be higher if a person accumulates sizable debt now.

You can experiment with the timing, different interest rates and different levels of borrowing on the student loan calculator at finaid.org/calculators/loanpayments.phtml.

A good rule of thumb, however, is for students to borrow the maximum level under the federal student loan program before parents do any borrowing with PLUS loans. The rates are lower on federal loans for students, and parents can help students pay off loans if they wish. See loan types and limits at studentaid.ed.gov/types/loans.

In addition, if students have trouble affording loan payments because their income after college is too low, the government will lower payments temporarily. Parents using PLUS loans are not given relief based on their income.

gmarksjarvis@tribune.com

twitter @gailmarksjarvis