updated 5/17/2005 6:31:31 PM ET 2005-05-17T22:31:31

A quiet announcement by the Department of Education this week could translate into thousands of dollars of savings for student borrowers by allowing them to consolidate their loans before rates go up July 1.

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The announcement applies to students with government-backed Stafford loans from banks or commercial lenders. Students who borrow directly from the government have always been free to consolidate while still enrolled, but until this week, it was unclear if borrowers from commercial lenders could, too.

The discrepancy was no big deal in the past because students were in no rush to consolidate loans. Interest rates were falling, and the price of consolidating — students must forfeit a six-month grace period after graduation before repayment is required — wasn't worth it.

This year, however, interest rates for students still in school are expected to rise from the current 2.77 percent to as much as 5 percent when the new rates are announced July 1. By consolidating, students will still forfeit the grace period — but some may save thousands of dollars by locking in the lower rates.

Even before this week's announcement, many students and banks were already interpreting federal guidelines as allowing students to begin their repayment period while still enrolled — thus making them eligible to consolidate.

On Monday, the department gave a formal green light to the practice.

The Department of Education said Tuesday that, as of April 1, there were 5.7 million borrowers with outstanding loans from private lenders who were either in school or in the post-graduation grace period.

The College Loan Corp. estimates the average borrower with $20,500 in debt — the average amount consolidated last year — would save more than $2,100 over a 10-year loan by consolidating now, based on the most recent interest rate estimates.

Experts caution consolidation is not for everyone, however, given the forfeited grace period and the risk that interest rates could decline in the future. If so, students might regret locking in at a higher rate.

Assistant Secretary for Postsecondary Education Sally Stroup said it's impossible to say how many students in the Federal Family Education Loan Programs would take advantage of the new guideline. She said those with the most debt would likely find the opportunity the most attractive.

"Particularly for students who are in graduate school, people with a high balance, it would make a difference," she said.

But Brett Lief, president of the National Council of Higher Education Loan Programs, said it may make sense even for some underclassmen — particularly people who have borrowed a lot — to take advantage by consolidating and then asking for a deferment on payment until they are out of school.

He urged students to get counseling about what decision is best for them — and to remember that lenders must have applications for consolidation in hand by June 30.

Student savings, however, may come at taxpayers' expense. Bob Shireman, director of The Institute for College Access and Success at the University of California, Berkeley, said the policy "offers borrowers lower interest rates and some relief from the burden of debt," but will be more expensive for the government.

Stroup, however, said it is impossible to say whether it will cost the government more in the long run, given the unpredictability of interest rates and the repayment schedules of students.

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