If you're heading off to college, prepare to dig a little deeper into your pockets. Borrowing money to pay for higher education is becoming more expensive.
In July, interest rates will climb on the federal loans students take on to pay for college this fall. Rates on undergraduate Stafford loans are jumping to 4.45 percent, from the current 3.76 percent. Graduate students with Stafford loans are going to face a rate of 6 percent, up from 5.31 percent. And parents and graduate students borrowing with federal Plus loans will face an interest rate of 7 percent, instead of this year's 6.31 percent.
While the bump in interest rates is not huge, students in college during the next few years are likely to face more increases. Interest rates have been at historically low levels, and economists are expecting rates to keep climbing in 2018 as the economy strengthens.
Trying to avoid the increase by quickly borrowing before July won't solve anything, said Mark Kantrowitz, publisher of Cappex.com, a college search and student loan site. Borrowing for the 2017-18 school year has to be done at the new rates and those rates will apply from July 1 to June 30, 2018.
For an undergraduate student, the increase will add $3.29 per month for every $10,000 a student borrows, assuming the student repays the loan in 10 years, which is a typical repayment period.
Although the new loan rates won't become official until July, the formula used by the Department of Education makes clear what the new rates will be. The federal student loans rates are tied to the rates on 10-year U.S. Treasurys auctioned in May. Those rates were up 0.69 percent this May compared with 2016.
With the higher student loan rates, an undergraduate student will pay about $395 more in interest over 10 years on a $10,000 loan, a graduate student with Stafford loans will pay $412 more, and parents with Plus loans will pay $423 more, Kantrowitz said.
The average undergraduate student who leaves college with loans has about $30,000 in debt. It's not unusual for graduate students to take on $100,000 or more in debt.
If President Donald Trump's budget recommendations are passed by Congress, the pain could be intense for graduate students, said Kantrowitz.
Under the proposals, graduate students would no longer be relieved of their student debt the way borrowers have been under the Obama administration. Under President Barack Obama, the government instituted an income-based repayment plan, which allowed people to reduce their monthly student loan payments if their incomes weren't high enough to cover the full cost.
In addition, after 20 years of paying off student loans, any remainder left on the loans was to be forgiven. But under the latest Trump plan, graduate students would have to keep paying off their loans for 30 years.
The assumption under the Trump plan seems to be that graduate students typically have good salaries after finishing their education and can afford to pay, but Kantrowitz said the same rules would apply to graduate students regardless of the salary their intended field pays.
"Would you want to be a social worker under these conditions?" he asked.
Undergraduate students would come out better. The Trump proposal would free them of their student loan debts after they devoted 12.5 percent of their discretionary income to the loan payments for 15 years. Currently, they only have to devote 10 percent of discretionary income, but they must do so for 20 years.
Other changes in the Trump budget would cut out subsidies for low- and moderate-income students. With the subsidies, the government steps in and pays interest on the loans while a low- or moderate-income student is still in college or after college if there's a period when a borrower is temporarily not working. Without the subsidies, students with Stafford loans are freed from paying interest while in school, but the extra interest is tacked onto the end of the loan and must eventually be repaid.
Kantrowitz is worried that the cuts will make some low-income students reluctant to go to college.
Yet another cut would focus on public service jobs. Currently, college graduates can be relieved of their student loans if they take on jobs such as public defenders, doctors in rural areas, military or teachers for disadvantaged students. First they must make payments for 120 months.
Still, all the Trump proposals are merely proposals at this point and will not be enacted unless Congress approves them.
What is definite at this point is that interest rates on federal student loans will be increasing in July and probably again in 2018. And with benefits like income-based repayment still intact, students will be better off borrowing through the federal student loan program; even with higher rates. Although banks and private lenders might offer lower introductory interest rates, the rates typically don't stay low indefinitely and they don't forgive loans or lower monthly payments if a graduate is in financial distress.
Our editors found this article on this site using Google and regenerated it for our readers.
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