Alternative college loan student

College graduates with outstanding Stafford loans have until January 31 to refinance with the federal government at an attractive 7.46%, or consolidate their loans with a private lender for comparable interest savings.

The deal is part of the recently passed amendments to the Higher Education Act. With the Federal Direct Loan program, the changes set a variable rate that's pegged to 91-day Treasury bills (currently 7.46%) and capped at 8.25%. A borrower who is paying off loans over ten years at a fixed 8.25% could save about $50 in interest for every $1,000 of debt by refinancing to 7.46%.

But you can probably do better overall by refinancing with Sallie Mae (or Citibank, USA Group and others with similar programs). Sallie Mae offers a fixed-rate loan at 8.25%, but you can shave a quarter-point off that rate by signing up for automatic debits from your bank account, and one or two more points by making 48 on-time payments. That puts the loan rate at 7% or even 6% (depending on the repayment plan you choose) in the fifth year and beyond. If you're paying off loans at 8.25% or more without such "borrower benefits," it pays to refinance.

STRETCHING IT OUT. Once you've made that decision, you'll have to choose either the standard ten-year repayment term or an alternative repayment plan that reduces your monthly payments but stretches them out over a longer term. Conventional wisdom argues for retiring the debt as quickly as possible. But for many borrowers, the alternatives are a better choice--if not a practical necessity.

For instance, Beverly Hyken of Jacksonville, Fla., couldn't swing a payment of $208 a month on $17,000 in Stafford loans at 8.25% (plus another $50 a month toward a separate loan) on her entry-level pay as a radio news producer (typical salary, about $20,000). So she's starting off with interest-only payments of $117 a month. If she continues those for four years, then makes steadily rising payments for another 11 years (eventually reaching $210), she'll pay a total of $29,371, allowing for a two-point reduction in the interest rate after four years of on-time payments.

That's a savings of nearly $2,000 compared with the Federal Direct Loan program, in which Hyken would pay $31,096 over 15 years at 7.46%, with payments beginning at $106 and rising to $276. She also could have chosen an extended loan term with level payments, or payments calculated annually on the basis of income. (You can work through your options using the calculators at www.ed.gov/directloan and www.salliemae.com.)

DEBT CAN BE CHEAP. Affordability may not be the only reason to extend repayment. Consider Mack Lee Sullivan, a doctor of emergency medicine, who will start repaying his student loans in July when he finishes his medical residency at the Albert Einstein College of Medicine, in New York City. With accrued interest, Sullivan expects to owe more than $200,000, which would cost roughly $2,500 a month to repay over ten years. Even with high earnings, that's too much income to commit to student-loan payments (Sullivan might have a tough time, for example, qualifying for a home mortgage).

And there's an even better reason for him to string out his student debt: It's cheap. If Sullivan pays off his loans over 30 years through the Sallie Mae program, in 26 of those years he could be paying just 6% or 7% interest. (For borrowers earning less than $55,000 and filing individually or $75,000 and filing jointly, some of the interest would even be tax-deductible--up to $1,000 in 1999, $1,500 in 2000 and $2,500 a year after that.)

Using a graduated-repayment plan, Sullivan would start with payments of about $1,200 a month, rising to about $1,700. It's likely he'd invest at least part of his savings; even on a resident's salary Sullivan has managed to invest $850 a month in stocks and mutual funds. If he keeps up the savings habit (especially by funding a retirement plan with pretax dollars) and earns, say, 10% a year, he'll be way ahead when he finally sends off that last student-loan payment in (gulp) 2029.

To apply for refinancing, contact your lender, Sallie Mae (800-524-9100) or the Federal Direct Loan program (800-557-7392).