By Dolores Kong
The Boston Globe

Jason Mendonca, a newly minted MBA, owes $27,000 on education loans. It's a situation facing recent graduates across the country, whether or not they're ready to start paying. "It's kind of bittersweet, because the job market is a little sour," Mendonca said.

But the 27-year-old, who is a financial aid coordinator at Northeastern University, isn't worried. He knows that after July 1 he can lock in the lowest-ever interest rates on student loans, as low as 3.46 percent. With the costs of college and graduate school and debt loads for students and parents continually rising, paying for higher education has never been a bigger issue. After four years of college, the typical graduate owes $16,500, according to the financial aid Web site www.FinAid.org. Add a business, law, or medical degree, and the debt can exceed $100,000.

Those who lock in these historically low interest rates over the next year could save thousands. "It's a chance of a generation. Rates have never been this low before," said the publisher of FinAid.org, Mark Kantrowitz.

Every July 1, rates are adjusted on many federal education loans, including so-called Stafford and PLUS loans, two of the more popular. Last July 1, rates fell to just under 6 percent for many Stafford loans and just under 7 percent for many PLUS loans. But the new rates taking effect Monday will be as low as 3.46 to 4.06 percent for Stafford loans and 4.86 percent for PLUS loans. Those rates will stay until July 1, 2003, and then will most likely head back up.

Not everyone who has an outstanding student loan will benefit, however. Borrowers who have already locked in rates as high as 9 percent are out of luck, because the federal loan program usually allows only one loan consolidation, as the interest-rate lock-in is called. And while students and parents paying off Stafford and PLUS loans from the mid-1990s will be able to benefit, rates won't come down as much as for more recently disbursed loans.

The rates for special programs for business, law, and medical school will drop, but not as low as those for Stafford loans. Borrowers with Perkins loans will continue to pay a fixed 5 percent.

With student loans so complicated, schools such as Northeastern and Boston University are incorporating debt management and other financial advice into the "exit counseling" they give graduating students. Seamus Harreys, dean of student financial services at Northeastern, said nearly 2,000 members of this year's graduating class have visited his office for one-on-one counseling. And because interest rates will be so low, his staff, including Mendonca, have been urging students to consider consolidating loans.

In some cases, it may make sense for a graduate to start paying back a Stafford loan even before the six-month grace period is up, to lock in an extra-low rate of 3.46 percent, available only while a student is still in school or in the grace period. Otherwise, a 4.06 percent rate will kick in.

Students should check with their lenders to make sure that by taking the 3.46 percent rate they're not giving up other special discounts, though.

Students also need to consider whether they plan to attend graduate school, because consolidation means giving up the ability to defer repayment if they return to school.

At Boston University, the Perkins, at 5 percent, is the largest loan program for students, instead of the variable-rate Stafford that's dipping down to 3.46 to 4.06 percent, said Vincent Simonelli, director of student loans.

His staff discusses the advantages and disadvantages of consolidating Perkins with Stafford loans to get a weighted average interest rate that's lower than the fixed 5 percent. But by consolidating a Perkins loan, a student may lose the loan forgiveness provisions available only through Perkins.

Kantrowitz says borrowers should be aware of:

* The single-lender rule. If all your loans are from one lender, you must first approach that lender for consolidation. If that lender doesn't offer a repayment option you want, you can go to another lender. The US Department of Education's Direct Consolidation Loan program is the only one offering such an income- contingent feature, and will forgive the loan if there's still a balance after 25 years. If your loans are from different lenders, you can approach any of them.
* Special discounts for electronic funds transfer and on-time payments. Some lenders, such as Sallie Mae, offer up to an additional 1.25 percent discount. That could bring down already low rates to about 3 percent after consolidation and after the lender's required months of on-time payments have been met. (It's 48 months for Sallie Mae.)
* Start consolidation process by April 2003. While interest rates will automatically adjust downward July 1 and stay there for a year, don't forget to start the paperwork to lock in the low rates before next July. It will take lenders six to eight weeks to process the consolidation paperwork, so start by April at the latest.

For more information:
and www.ed.gov.