Students sacked by rising interest rates on federal college loans can take steps to lessen the burden of debt.

Congress has proposed raising interest rates on federally guaranteed student loans, and President Bush is expected to sign the proposal into law. But Frank Ballman, a college finance expert formerly with the federal student loan maker Salle Mae, notes that the government allows students and their parents to consolidate multiple loans at a lower rate, and take longer to repay debt.

Under the new bill, the interest rate on loans consolidated before July 1 will be fixed at an amount equal to the weighted average of the rates on a borrower's current debt. This means that the consolidated interest rate will fall below the rate on a student's largest outstanding loan.

Recent graduates with Stafford loans can consolidate and lock in a fixed rate of 4.75%. Those who graduated more than six months ago would pay 5.375%. Parents who have taken Plus loans to finance a child's education can consolidate at a fixed rate of 6.125%.

Without consolidating, repayment rates vary and are reset annually based on the interest rate of Treasury bills. If rates were reset today, Stafford loans would charge 6.1% for recent graduates, and 6.7% for anyone who has graduated more than six months ago. Plus loans would carry a rate of 7.5%.

The repayment term on consolidated debt can also be extended beyond the 10-year cap on most federal education loans. Students with loans between $20,000 and $40,000 can take up to 20 years to repay them. Borrowers with up to $60,000 in debt can take 25 years to repay. For loans of $60,000 or more, students and their parents can take as much as 30 years for repayment.

On most federally secured loans, borrowers can reduce the interest rate by 0.25 percentage points just by having the payment automatically deducted from their checking account. In addition, rates can fall by as much as a full percentage point for borrowers who make their first 36 payments on time.

Some states, including Ohio, Texas and Pennsylvania, provide further rate reductions for prompt repayment. Students of schools in California, for instance, are eligible for a 2 percentage point decrease on their college loan interest by making payments on time.

Finally, with tax season approaching, don't forget that interest on student loans is tax deductible for most people.

Click here to visit our College Planning page.

Copyright (c) 2006 MarketWatch, Inc.