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With the PLUS Loan Interest Rate Loophole, you can use consolidation to reduce the interest rate on 8.5% fixed rate PLUS loans by 0.25%. The Higher Education Reconciliation Act of 2005 increased the interest rates on PLUS loans starting July 1, 2006, to a fixed rate of 8.5%, but left the interest rate formula on consolidation loans unchanged. In particular, it left the cap at 8.25%. So a PLUS loan borrower can reduce the interest rate on a PLUS loan by 0.25% simply by consolidating it, so long as the PLUS loans are consolidated by themselves.

You don't want to include other types of loans in the consolidation loan because the weighted average will reduce the interest rate before applying the cap. Consolidating PLUS loans by themselves maximizes the impact of the 8.25% cap.

There are no reasons why you can't consolidate a PLUS loan, so borrowers of 8.5% fixed rate PLUS loans may wish to consolidate them to reduce the interest rate. Parents of undergraduate students will be able to consolidate them soon after the PLUS loan is fully disbursed. Graduate and professional students, however, will need to wait until they graduate to consolidate, since in-school consolidation was repealed effective July 1, 2006. Since PLUS loans do not have a grace period, there is no reason to not consolidate them.

There is, however, a caveat. Often lender discounts on consolidation loans are inferior to the discounts on unconsolidated loans. So before you consolidate a PLUS loan to reduce the interest rate to 8.25%, compare the discounts you will be getting from the originating lender and the consolidating lender. If the originating lender has already discounted the interest rate below 8.25% without requiring prompt payment or automatic payment, it might be better to stick with an unconsolidated PLUS loan.