Student Loan Interest Rates Up, Now What?

Undoubtedly you have seen the news, read the reports or overheard someone talking about how student loans are about to get more expensive. Are we about to throw another monkey on these poor student’s backs or is there another side to this tale?

What is Going On?

It is true. The interest rates for federal student loans are scheduled to increase July 1, 2014. That means that the new rate applies only to student loans taken out on or after July 1 of this year. In other words if you or your student is entering college this fall, this means you. At the same time, note that current law stipulates this rate is also scheduled to “adjust” each year on July 1. Thus you can look forward to yet another increase next year.

The Fine Print

How much of change are we talking about anyway? The new rates break down like this: new Stafford loans to undergraduate students will increase by a measly 0.8%, from a current 3.86% to the new rate of 4.66%.

Do take note of the fact that there are actually two types of Stafford Loans. There are subsidized Stafford Loans where interest does not actually start being charged until the student is out of school. Naturally, if there are subsidized Stafford Loans there have to unsubsidized versions. The unsubsidized Stafford Loans rack up interest while the student is still in school.

For graduate students, the Stafford Loan rates are a tad bit higher. The interest rates on Stafford Loans for graduate students is set to rise to 6.21% from the current 5.41%.

On the other hand, for those that need to take out PLUS loans (for graduate students or parents) the rate change goes from the current 6.41% to the new improved rate of 7.21%.

Why?

Why is this happening, and why is it happening right now? After all, the economy is improving. You would think we wouldn’t want to burden our poor students anymore than we have to, right? Hold on, take a look-see at what’s behind this headline news.

Blame Your Congressman/Congresswoman

You see, back in 2013 Congress passed a little law that changed how student loan interest rates were setup. Congress, in their studious wisdom decided and decreed that student loan interest rates should henceforth be tied to something more appropriate to the modern era. They settled on using the 10 year Treasury note as the basis.

Determining the Rate

Ready for doozy? It turns out for the new way of setting federal student loan interest rates you have to start with the 91-day rate from the most recent Treasury Auction (which would have been May). Now factor in the average one-year constant maturity Treasury yield (CMT) for the last calendar week ending on or before June 26th. OMG, my head is spinning. Anyway, you do all that stuff and you can figure out where the numbers came from. It works out that in essence you end up adding 2.05 points to the 10 year Treasury notes for a Stafford Loan and 4.6 points for a Plus loan. Enough of that?

What it Means

Certainly it means that this year’s freshman class will be paying more when their student loan bills start coming due. Is it too much to bear? Will this be the straw that breaks the camel’s back?

Consider that as recently as 2012 an astounding 71 percent of college graduates left school with student loan debt. Get this, we aren’t talking chump change here. The 2012 average student debt load was just over $29,000. Wow!, no wonder they wanna move back in for a while.

What it Really Means

Put all of the above aside for a moment. Take a step backwards and approach this as the savvy personal financial person that you are. No question about it, an increase in interest rates mean that the payments will be higher. But how much higher? How about $46 per year for each $10,000 borrowed (based on a 10 year repayment schedule). Will a measly $46 sink the ship? Probably not.

The Rest of the Story

Hey wake up. Student loan debt and interest rate increases are the price of admission. So think about it this way. For about $30,000 (based on the 2012 average student loan debt reported above) a high school graduate can buy a new car or a new career. When you put it that way, you can’t deny what a bargain a student loan really is.

What about You?

What’s your take on this student loan interest rate thing?

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