Effective July 1, the interest rate on government-backed Stafford student loans taken out on or after July 1, 1998, dropped to 4.06 percent from the previous year's rate of 5.99 percent. Two years ago, the rate was 8.19 percent. Rates for PLUS loans, taken out by parents, dropped from 6.79 percent to 4.86 percent.

The U.S. Department of Education estimates that under the lower rate, a student owing $10,000 would save $1,133 over the life of a ten-year standard repayment period. Four-year graduates typically owe $12,000 to $17,000 in student loans, according to various studies.

The catch to the $1,133 savings example given by the government is that the lower rate is not guaranteed for ten years. It is only guaranteed until July 1, 2003. The rate is tied to the 91-day Treasury bill, and because the nation is in an extremely low-interest-rate environment, many experts expect rates to be reset at a higher rate next July. A loan consolidation would turn these variable rates into fixed rates, and if taken out within the next year, would lock in the lower rates.

Here's how a loan consolidation works. Students typically accumulate multiple loans, issued at different interest rates and sometimes by multiple lenders, resulting in multiple loan payments whose rates are reset up or down once a year. A loan consolidation rolls these multiple loans into a single payment and fixes the rate for the life of the consolidated loan period. The rate is based on a weighted average of the multiple loans, rounded up to the nearest eighth of one percent. (You can calculate this weighted average online by going to www.loanconsolidation.ed.gov) For most students borrowing since July 1, 1998, this effectively means a consolidated loan of just above 4.06 percent. For students with loans prior to 1998, the consolidation rate would be higher, but still significantly lower compared with a year or two ago.

The consolidation rate is even lower -- 3.46 percent -- for students who consolidate while they are still in school, during the six-month grace period following their graduation, or who are receiving a loan deferment. The only drawback is that once you consolidate, you must begin loan payments immediately.

Consolidation also may allow you to extend the repayment period, sometimes up to 30 years for larger loan amounts, thus lowering monthly payments. That can be good news for recent debt-burdened graduates struggling to find good-paying jobs (though there are drawbacks, as noted below).

Surprisingly, despite the many benefits of loan consolidation, a study by loan consolidator Collegiate Funding Services found that 54 percent of students are not even aware of the consolidation option. Still, loan consolidation is not right for everyone.

• You can't consolidate certain college loans, such as state or private loans not federally backed.
• Unlike home refinancing, once you consolidate a group of college loans, you cannot reconsolidate those same loans should rates drop yet lower. That's probably not likely in this low interest-rate environment, but those who consolidated last year in a low-rate environment found out rates still had more to drop.
• Although extending the repayment period through consolidation makes the monthly payments smaller, you end up paying more interest over time. Keep the repayment period as short as you can afford to, or, because there is no prepayment penalty, accelerate payments during more flush times. It's probably not worth consolidating if you're close to paying off the loan. 
• Many lenders provide discounts for borrowers who pay on time their first four years, but those discounts usually don't apply to consolidated loans.
• Don't consolidate Perkins loans if you plan to go back to school because you'll lose the in-school interest-rate subsidy.
• Experts generally advise married couples not to consolidate jointly because the federal government will no longer forgive a spouse's individual loans if he or she dies or is disabled. The survivor becomes responsible. The same applies to a divorce situation.