Still paying off college loans? You should know the interest rates on federal loans are headed higher – much higher.

The U.S. Department of Education on May 30 will announce new interest rates for subsidized Stafford loans and Parent Loans for Undergraduate Students, or PLUS loans. Financial aid experts expect interest rates, pegged to increases in the 91-day U.S. Treasury bill rate, to jump about 2 percentage points – to about 6.7 percent for the Stafford and 8.1 percent for the PLUS. The new rates will take effect July 1.

Yikes! Don’t want to pay the new rates? You need to consolidate your loans by June 30.

By consolidating, you (or your parents) can lock in the lower rates for the life of your loan. You’d save about $2,400 on a 10-year loan for $20,000, said Mark Kantrowitz, a college financing adviser in Cranberry Township, Pa., who operates a Web site offering student loan advice called

“It’s a no-brainer,” he said. (By the way, if you want to run the numbers on your loans, Kantrowitz’s site has a loan calculator.)

This year’s rate increase stands to be as big as last year’s, which was the largest since 1980 and triggered a rush to consolidation, according to financial aid lenders. The College Foundation of North Carolina recommends not waiting until the last minute to look into consolidation. It said that last year people had trouble getting through on the deadline day when its phone and fax lines were jammed with more than 33,000 calls.

Loan consolidation combines several loans into one big loan with one monthly payment.

To consolidate you have to have more than one loan, at least one of which has never been consolidated before. You can’t consolidate federal loans with private ones.

A loophole in federal law allows students to consolidate loans while still in school. That loophole will be sewn up on July 1, so if you are still in school and want to consolidate, just remember you have until June 30. You should realize that if you consolidate while in school you have to start repaying your loans 60 days after leaving school or graduating. Those who don’t consolidate loans while still in school get a six-month grace period to start repaying loans.

“The financial benefit of locking in at a 2 percentage-point lower rate far outweighs the six-month grace period,” Kantrowitz said. “If a (former) student has trouble finding a job, there is always an economic hardship deferment they can apply for that would allow them to defer payment for three years.”

When you consolidate you often can choose to increase the term of your student loan from the standard 10 years to as much as 30 years. Of course, if you are looking to save on interest payments then extending the life isn’t what you want to do.

To get started consolidating, contact your lender or lenders and ask if student loan consolidation is offered and if you qualify. The rate on the consolidated loan will be calculated and fixed as the weighted average of the relatively lower rates you already have, adjusted up to the nearest 1/8 percentage point. You will have to start payments on the new loan within 60 days.

Amy Baldwin covers money-related topics for 20- and 30-somethings in “Out of the Red.” Have a question about your personal finances? Contact her at (704) 358-5179 or Leave your name and daytime phone number.