A way to pay for college that doesn’t involve borrowing money
Undergraduates can expect to pay 4.45% interest on new Stafford loans, up from the current 3.76%. At this current rate, a student borrowing $5,000 would repay a total of $6,007 with interest over the standard 10-year term. But a freshman who takes out a $5,000 loan for the 2017-18 academic year will pay $196 more in interest with the new rate, assuming she pays off the loan in 10 years.
For graduate students, the interest rate on new direct loans will drop from 5.31% to 6%. A graduate student who took out a direct loan of $20,000 in the last school year would have to shell out a total of $25,821 to pay off the debt in 10 years. The same loan amount will cost $833 more.
Parents who take on federal debt to help their children get a bachelor’s degree can expect to pay 7% on a PLUS loan, instead of 6.31%. If Mom and Dad take out a loan of $10,000 PLUS at the new rate this coming school year, they would be looking at a total repayment charge of $13,933 over 10 years, an increase of $423.
What to do when you haven’t saved much for your child’s college education
Since many students and their families have to borrow money each year, continued annual increases could have significant consequences. If there are a few more rate increases over the next few years, a student graduating with $31,100 in loans at a blended rate of 5.1% would pay $49,672 to pay them off over 20 years – 5,380 $ more than the $44,292 in total repayment fees they would be looking at had they been able to take out all of their 3.76% loans, said Stephen Dash, chief executive of Credible.com, a marketplace for student loans.
“Students and their families should not panic about this year’s increase, but they should keep in mind that if interest rates continue to rise while they are in school, it will will also impact their monthly payment and total repayment costs after graduating,” Dash said. “They should be aware that because some colleges are charging their financial aid offerings, they may receive less financial aid every year they enroll and have to borrow more when they’re seniors than they did when they’re freshmen.”
Dash said it expects student loan rates to rise due to market reaction to President Trump’s election. Treasury yields soared after the election as investors bet on increased government borrowing to pay for promised tax cuts, infrastructure and defense spending. A year ago, around this time, 10-year Treasury yields were 1.71%, but as investors expect increased economic growth and weary of safe investments such as bonds , 10-year yields are at 2.4%, Dash said.
The new rates closely track projections from the Congressional Budget Office, which called for rates above 6% on undergraduate loans, 7.5% on graduate loans, and 8.5% on PLUS loans. ‘by 2018. The government resets student loan interest rates each year based on the spring rate of the note, plus a fixed margin. Next July’s rates could be higher, but there are protections for families.
To keep education loan rates from skyrocketing, Congress set a ceiling. Interest rates on undergraduate loans can never exceed 8.25%. Graduate loans are capped at 9.5%, while the PLUS loan limit is 10.5%. Lawmakers decided years ago to tie federal student loan rates to the market, rather than set them. If Congress did not act, undergraduate loan rates would double to 6.8%.
“Higher federal student loan rates and more expensive loans for the 2017-2018 school year isn’t exactly welcome news, but some things haven’t changed for borrowers because federal student loans are still a better bet than private loans,” said Brianna McGurran. from the personal finance website NerdWallet. “Because their interest rates are fixed, they won’t increase in the future, and they also come with crucial protections like income-contingent repayment and the indulgence for public sector workers.”
Students with federal student loans can enroll in income-based repayment plans that tie their monthly payments to a percentage of their income, so students with little money or those going through tough times can manage their payments.
Want to know more about college payment? Check out these stories:
How to Negotiate Better Financial Aid
How to Read a Financial Aid Award Letter
Sallie Mae deploys loans to parents to pay for her studies