Interest rates on Direct Subsidized Loans to undergraduate students will be reduced in annual steps to 3.4 percent by July 1, 2011. The rate beginning July 1, 2010, is 4.5 percent. Interest rates on other Direct Subsidized and Unsubsidized loans issued since July 1, 2006, are fixed at 6.8 percent. New Direct PLUS loans carry rates of 7.9 percent.

If you have a Stafford or PLUS loan issued prior to July 1, 2006, the interest rate will continue to be variable. The rate will be adjusted annually effective July 1, based on prevailing interest rates on short-term government securities.

For information about the current interest rates on variable-rate Stafford and PLUS loans, download an interest rate chart. 

 Here are items to consider to reduce the cost of borrowing for college:

Reduced loan fees.  Effective July 1, 2010, loan fees on new Direct Stafford loans are reduced to 1 percent.  

Borrower benefits. Some lenders offer interest-saving borrower benefits on Federal Family Education Loan program loans. Typically, these benefits provide a reduction in the interest rate for borrowers who permit their loan payments to be deducted automatically from their bank account or consistently make on-time loan payments for several years.  Direct Loan borrowers may qualify for a 0.25 percent interest rate reduction if they permit their payments to be deducted automatically from their bank accounts. Direct Loan borrowers also qualify for an upfront interest rebate that they retain as long as they make their first 12 required monthly loan payments within six days of the due date. For Direct Subsidized and Unsubsidized Loans with a first disbursement on or after July 1, 2010, the upfront rebate is 0.5 percent. For Direct PLUS loans the interest rebate is 1.5 percent.

Student loan interest deduction. You may qualify to deduct up to $2,500 of the education loan interest that you paid during the tax year, subject to income limits and other restrictions. You don't have to itemize deductions to claim the student loan interest deduction; however, you must file Form 1040 or Form 1040A. If you're married, you must file jointly to claim the deduction.

Federal interest subsidy. Students who demonstrate economic need may qualify for subsidized loans. The federal government pays the interest that accrues on these loans while the borrower attends school, for six months after the borrower leaves school, and during periods when the borrower is authorized to defer loan payments. For an undergraduate student who borrows a total of $10,000 over four years of college, this subsidy could produce interest savings of $1,500. To determine their eligibility for subsidized loans and many other forms of financial aid, students must complete and file the Free Application for Federal Student Aid by the date recommended by their respective schools.