This year, hundreds of thousands of students are expected to do something never before considered possible in the 40-year history of the Federal Family Education Loan Program: Consolidate their student loans while they are still in school.

That would allow them to lock in today's rates on student loans before the rates are poised to rise in July. The current rates available on consolidation loans are as low as 2.88 percent -- the lowest in the program's history. With lenders offering a slew of discounts for automatic and on-time payments, that rate can be knocked down even more.

The opportunity to consolidate loans is one of the key features of the government program, which guarantees loans offered through private banks. It gives people a one-time opportunity to refinance their student debt from different sources into a single, fixed-rate loan.

Traditionally, though, students had to wait until after graduation to do this. That is because the program's rules state that borrowers must begin repaying their student loans (or be in a six-month "grace" period after graduation) in order to become eligible for consolidation.

But now, college financial-aid departments and others in the education-finance world are touting what they say is a loophole in the Higher Education Act that authorizes the government program. The upshot, they say, is that students can go into repayment while still in school and thus become eligible to consolidate. Many lenders are saying it isn't even necessary to actually begin repaying right away, just to indicate your intention to do so.

The Department of Education has yet to rule on the validity of this interpretation. But with rates likely to rise significantly this summer, some schools are urging that both graduating and continuing students consider consolidating this spring. At the University of California, student financial-support coordinator Nancy Coolidge has been working to encourage tens of thousands of borrowers on the 10-campus system to take advantage of consolidating at current rates. "We are very confident that this is very legal," she says.

A number of lenders, including Nelnet Inc. of Lincoln, Neb., one of the biggest players in the consolidation-loan market, say they will refinance loans for current students. And behemoth student-loan company SLM Corp., better known as Sallie Mae, is making preparations in anticipation of a green light from the Department of Education, which governs both FFEL and the separate William D. Ford Federal Direct Loan Program.

There are some caveats to the approach. While many are hoping that the Department of Education will approve the approach in the near future, there is a chance that it could give a thumbs down and disallow any refinancings that have been done by students still in school. In that case, students would still have their underlying loans, but they would lose the refinancing. "We believe guidance will be needed and we are working on answering the questions we've received," says Stephanie Babyak, a spokeswoman for the department.

In addition, borrowers lose a six-month grace period after graduation, during which they don't have to pay any bills. Many lenders say that if they shift a current student into repayment, they will also allow a deferment until graduation so the borrower doesn't have to repay loans while still attending classes. But repayment would begin immediately after graduation.

Finally, any loans taken out after consolidation would carry the interest rate at that time, and not the current low fixed rate.

This in-school consolidation also doesn't make sense for every student. Many lenders require minimum balances of $7,500, and a first- or second-year student may not have accrued that much debt yet. And students would lose the opportunity to consolidate the entirety of their student loans at once after graduation. (Though they could later consolidate other loans acquired during the rest of their schooling.)

Nevertheless, finance experts expect a rush of undergraduates and grad students seeking to consolidate now. That is because in July, student-loan rates could rise by about two percentage points when they get their annual revamp. Because the rates are reset only once a year, they will likely reflect pent-up interest-rate increases. Also, the Bush administration has proposed changes to the federal program -- including shifting consolidation loans to a variable interest rate -- that could fuel the popularity of consolidating now.

In 2003, more than one million borrowers consolidated nearly $35 billion in FFEL debt. This year, that many or more in-school borrowers could seek to consolidate, increasing the refinanced debt by at least $10 billion, says Mark Kantrowitz, publisher of FinAid.org, a free Web site of financial-aid information. The added refinancings could be costly to the government, he points out, because the government subsidizes the interest rate that lenders get on federally guaranteed loans.

Graduate Leverage LLC, a Cambridge, Mass., consultant that negotiates borrower terms on behalf of graduate students, plans to send an email today to members about its efforts in encouraging lenders to use the new approach. Members who aren't graduating this year carry an average of $52,000 in federal debt. On average, they would save $17,000 over the 25-year life of their loan by consolidating early and at current rates, says the group's co-founder Daniel Thibeault.

At the University of Southern California, Associate Dean Catherine Thomas has sent emails out to more than 2,000 continuing graduate students with balances of as high as $200,000, suggesting they discuss the option with their lenders. "There is an opportunity for them that may not be there a year from now," says Ms. Thomas.

San Francisco-based Chela Education Financing Inc. says it will provide in-school consolidations to students who call and ask for it. However, "we're not marketing this," says Jon Hayward, business-development manager.

Edamerica, the student-lending unit of Knoxville, Tenn.-based nonprofit Edfinancial Services, also says it will offer in-school consolidation to students who call and request it, but will first offer counseling to students, making them aware of any potential pitfalls.

Sallie Mae has held conference calls with school representatives to go over how the early-consolidation process could work. "We want to be able to accommodate everyone who wants to consolidate," says an official with Sallie Mae. "But we want to be sure what we're interpreting is consistent with the department's interpretation."

Others are coming out more boldly. Nelnet put a pitch right up on its Web site: "Are you still in school? Find out how to consolidate your student loans and secure a fixed interest rate!" In the absence of any guidance yet from the Education Department, says Nelnet spokeswoman Cheryl Watson, "we're moving forward."

Student Refinancing

Some lenders that will allow loan consolidation by borrowers who are still in school:

Nelnet Inc.
Collegiate Funding Services Inc.
NorthStar/Total Higher Education(1)
Edamerica
(1)Only for students at schools where it already does business
Source: the lenders