College Loans Get Cheaper

The cost of sending Junior or Sis to college has outstripped the inflation rate for years, but for some anxious parents at least one part of the cost picture is getting a little rosier. The interest rate on federally subsidized Stafford loans has gone down and is expected to trend lower over the next few years. The interest rate on subsidized Stafford loans, which is fixed for the life of the loan, is currently 5.6% for the 2009-2010 academic year, down from 6% for the previous year.

For the 2010-2011 academic year, rates are expected to dip to 4.5% and slide even further, to 3.4%, for the 2011-2012 year. The impetus behind the interest-rate cuts is the College Cost Reduction and Access Act passed in 2007, which included a promise to lower rates on all subsidized Stafford loans generated through July 1, 2012. Although the program has not achieved its original goal of cutting those loan interest rates in half, the lower rates can translate into savings of thousands of dollars over the life of the loan.

Subsidized Stafford loans are based on financial need, which means the student seeking such a loan must fill out the Free Application for Federal Student Aid (FAFSA). College counselors advise students to do this as soon as possible, since many colleges will make financial need decisions during February and March.

Students who don’t qualify because of financial need can opt for an unsubsidized Stafford loan, which carries a fixed interest rate of 6.8%. For more on the ins and outs of student loans and other college finance issues, FinAid.org is an excellent source of information.