This article was updated on July 17, 2001.

Got a couple of federally guaranteed student loans hanging around sucking up cash? The U.S. Department of Education (ED) has a deal for you!

Interest rates for all federally guaranteed, variable-rate student loans dropped dramatically on July 1. PLUS loans (to parents) dropped from around 8.99% to 6.79%, and Stafford loans (to students) dropped from around 8.19% to either 6.79% or 5.99% for loans currently in repayment. (The new rate depends on when the loan was originally disbursed.) The interest rate on deferred Stafford loans dropped from around 7.59% to either 6.19% or 5.39%.

That's great, but you can do better!

First, you can lock in these lower rates for the duration of your loan with a consolidation loan. Even if you just have one variable-rate loan, you can "consolidate" it to capture the lower rate.

But that's not all!

When you consolidate, you may also qualify for an extended repayment plan or an income-sensitive plan to reduce your monthly payments even more.

But that's not all! Along with a set of Ginsu knives, you'll receive...

A special incentive to reduce rates for consolidation loans went into effect last year when rates were relatively high. It expires September 30, 2001, so if you consolidate prior to that date, the new lower rates will automatically be reduced by an additional 0.8%. If you make your first 12 payments on time, the 0.8% reduction becomes a permanent part of your loan.

But that's not all! What else do we have for these fine folks, Barry?

A further reduction of 0.25% will apply as an incentive to set up your loan for electronic debiting. That's right, Uncle Ed will knock off another quarter percent if you let him directly debit your bank account each month. This is a doubly good idea since you want to be sure that your first 12 payments are received on time. It would be a shame to lose a 0.8% interest rate reduction because a check got lost in the mail. Combining these two incentive plans can reduce your consolidation loan interest rate by a total of 1.05% below the new, lower rates.

Yes sirree, folks, you can conceivably lock in an interest rate of 4.34% or 4.94% on a recent Stafford loan and 5.74% on a Plus loan for 10 to 30 years (depending on your loan amount and type)!

But what about ME?
You already consolidated your student loans? Well, the news isn't so great for you. But it's still good. When a loan is consolidated, the new rate is fixed at the weighted average of the rates currently in effect, so if consolidated before the rate drop, you are stuck with the higher rate.  However, you can "reconsolidate" your loan (even if you just have one loan) prior to September 30, sign up for electronic debit, and get the 1.05% reduction (if it's not already in effect). Some older consolidation loans have variable rates, though, and they can be reconsolidated at the newer rates so it can't hurt to check your loan's terms.

Other older loans, like those for the health professions or disadvantaged students, have always had very low rates. They can also be consolidated and the incentive interest reduction will apply to their already low rates.

What if you are still in school or your loans are currently deferred? Even though the new rates will apply automatically to your loans, you may still want to consolidate them to take advantage of the incentives and to lock in the low rates.

To take advantage of this once-in-a-lifetime special offer...
Get your consolidation application in before Sept. 30. That's when the 0.8% incentive expires. You have a three-month window of opportunity, July 1 through Sept. 30, to lock in these historically low rates. Details on the incentive programs are available at the USDE Consolidation Loan website.

You can call the U.S. Department of Education's Direct Loan Consolidation hotline at 800-557-7392 to request an application or to speak with a loan counselor, or you can apply online via the Online Consolidation Application. The Direct Loan Calculator will show you how the loan consolidation program will affect your payments and what your extended payment plan options are.

The fine print
Non-federally guaranteed loans are not eligible for either the new rates or the incentives. They are essentially consumer loans and cannot be rolled into the guaranteed loan program, but if you have non-federally guaranteed education loans, this might be a good time to renegotiate with your lender or see if another lender will offer you a better rate.

While the July 1 rates are set by law and will apply to all federally guaranteed student loans for the next year, the 0.8% incentive program applies only to loans consolidated by the Department of Education. About 70% of federally guaranteed student loans are made through banks or organizations like Sallie Mae. These private lenders have the option to match the ED incentive; however, most are not doing so. But there's still hope.

If you have a mix of direct ED and private loans, you can consolidate through ED. If all of your loans are from private lenders (but are still federally guaranteed), you must contact your current lender(s) first. See if they will match the ED consolidation incentive. If not, you can consolidate your private loans through ED under a program that allows them to consolidate private (but federally guaranteed) loans if the terms of the private lender are not acceptable to the borrower. What a deal!

Ann Coleman will be sending two kids to college in the near future, so she's doing all she can to find ways to make it affordable. The Motley Fool is investors writing for investors.