Student Loan Interest Rate Drops July 1

July 1, 2009 — The student loan interest rate on new Subsidized Stafford Loans for undergraduates drops to 5.6% today, a new low intended to make federal loans more palatable for students considering higher education. If you’re a laid-off worker thinking about going back to school for new education or training, this applies to you, too. Subsidized Stafford loans for undergrads are based on financial need; there is no age restriction for eligibility.

The interest rate for new Subsidized Stafford loans for graduate students, new Unsubsidized Stafford loans (not need-based), and new PLUS loans are unchanged from the 2008-2009 financial aid year: 6.8% for Graduate Subsidized Stafford loans and all Unsubsidized Stafford loans, 8.5% for PLUS loans taken out through the FFEL program, and 7.9% for PLUS loans taken out through the Direct Loan program.

However, interest rates also drop on variable-rate Stafford loans and PLUS loans issued between 1998 and 2006. For a student still in school, or whose loans are already in repayment, grace period, deferment, or forbearance, the rates on these loans now range from 1.8% to 3.28%. A table on the Department of Education’s website lists all the Stafford and PLUS loan interest rates effective today. You may be able to consolidate your existing student loans issued before 2006 at one of these rates.

While federal student loan interest rates go down, the upper limit on Pell Grants goes up: the maximum amount for Pell Grants for the 2009-2010 school year is now $5,350. Pell grants are awarded to students whose FAFSA, the Free application for Federal Student Aid, calculates Pell grant eligibility.

To qualify for Pell grants and the low interest rates on federal student loans, you must fill out a FAFSA every year.

The Wall Street Journal outlines the intricacies of federal loan interest rates and fees.

Financial aid definition for the day: the difference between “Lender” and “Loan Servicer.” A student loan lender and a student loan servicer are two different roles, although some financial institutions may be both (for example, Sallie Mae). A student loan Lender is a financial institution, bank, or lending organization that actually loans you the money for your student loan. A Loan Servicer is an organization that monitors the loan transactions and collects the money for the lender, but is not necessarily the organization providing the loan funds.

If the Obama administration succeeds in its proposal to eliminate the FFEL program and handle all federal student loans through the Direct Loan program, then the U.S. Treasury will be the Lender and the four financial institutions recently selected by the Department of Education will be the Loan Servicers handling future federal loans.

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