Student loan rates will hit a new low in July, and some lenders are crowing that now is the time for both graduates and indebted parents to consider consolidating outstanding loans in order to lock in the new rates.
"Just about every borrower who isn't in their last year of repayment should probably take a look at consolidating their loans," said Bob Murray, spokesman for USA Funds, an Indianapolis-based student loan guarantor.

Loan consolidation is the student loan industry's version of mortgage refinancing. It allows borrowers to put all their student loans in one package. In the process, they can stretch out the repayment period and take advantage of low interest rates by converting variable-rate debt into fixed-rate debt.

Stafford loans -- the most common type of student debt -- offer variable rates that are reset annually July 1, based on the 91-day Treasury bill rate set at the federal government's final auction in May. As a result of this year's auction, student loan rates will hit new lows next month.

Specifically, the rate on most loans already in repayment will fall to 3.42% from 4.06%. Rates on loans that are in a grace period that lasts six months after graduation will be even lower -- 2.82%, said Clark McGhee, executive vice president of Collegiate Funding Services in Fredericksburg, Va.

The rate on loans taken out by parents to pay their kids' education expenses -- called Plus loans -- will be slightly higher, set at 4.22%, based on the latest Treasury auction. Some older student loans, those made before 1998, also will bear higher interest rates ranging from 3.62% to 4.22%, Murray said.

The question of whether interest rates have reached bottom is an important one for any borrower considering consolidation. Consolidated loans can't be continually "refinanced" like a mortgage. Once a loan has been consolidated, the rate is set and cannot be reduced again.

Other cautions:

There are no fees charged to consolidate a loan, but the loan rate is the weighted average of all loans you consolidate, rounded up to the next one-eighth of a percentage point. In other words, the rate on unconsolidated loans is slightly better than that on consolidated loans.

Stretching repayment over an extended period reduces monthly payments but causes the borrower to pay more in interest over time. Still, many financial planners say locking in a 3% rate for a 30-year stretch isn't a bad idea, especially since there are no prepayment penalties on student loans.

Those who consolidate while their loans are in a grace period may lose the ability to go payment-free for the six months after college graduation, which can be a big loss in today's lackluster economy. Although it's a good idea to consolidate while still in the grace period because it allows the borrower to lock in a lower rate, borrowers should apply for consolidation near the end of the grace period to take advantage of the payment-free benefit, said Patricia Scherschel, consolidation executive at Sallie Mae.

It may not make sense to consolidate Perkins loans, which are federally subsidized fixed-rate loans, if the student is likely to go back to school or defer repayment, because the government pays the interest on Perkins loans when deferred.

Once a Perkins loan is consolidated, that subsidy is lost.