What if student loan rates double?
The interest rate for Stafford loans could increase to 6.8%. Students and their parents need a backup plan.
This post comes from Annamaria Andriotis at partner site SmartMoney.
A provision in a law that has kept rates down on subsidized Stafford loans is set to expire June 30. After that, rates will jump to 6.8% -- double the current rate. President Barack Obama has asked Congress to extend for another year the lower rates, which are part of the College Cost Reduction and Access Act of 2007. Some Republicans, however, have said they are concerned about the cost of keeping the current rates, which the nonpartisan Congressional Budget Office has said will cost $6 billion for one year. (Post continues below.)
Republican presidential candidate Mitt Romney said at an event on Monday that he supports temporarily extending low interest rates on student loans.
While the debate continues, most financial planners and academic experts are preparing for some changes in this federal student loan program, which was used by 7.4 million undergraduate students enrolled last year. If the law expires, interest rates return to their 2007 levels rather than being reset to reflect current monetary policy.
It is also possible that Congress could intervene. The House has scheduled a vote on one such plan for Friday.
A jump in rates would be broadly felt: If rates were to stay at 3.4% for several years, a bachelor's degree recipient with roughly $11,300 in total subsidized Stafford loans -- the average amount, according to FinAid.org -- would pay $15,630 over 20 years. If rates shoot up to 6.8% and remain there, this individual would pay an extra $5,125, or $20,755, over that period.
Many predict any rise in rates could push more families to seek out less-expensive colleges -- furthering a shift that is already under way. Roughly 22% of students from families making $100,000 or more a year attended a community college during the 2010-11 school year, compared with 12% the year before, according to the latest data from student lender Sallie Mae.
Students are already borrowing at record levels to keep up with rising tuition costs. Total student debt outstanding surpassed $1 trillion for the first time last year, according to the Consumer Financial Protection Bureau.
At the same time, cash-strapped states continue to cut financial aid to students. Some states slashed their grant programs by as much as 70% in 2011, according to the most recent data available from the American Association of State Colleges and Universities -- and industry experts expect reductions again this year.
"For parents, things could get even worse," says Chuck Drawbaugh, the president of College Funding Associates, a Rumson, N.J.-based college-planning consultancy.
In response, many financial planners are advising parents to consider other options besides government-sponsored loans.
One option for parents with excellent credit, planners say, is securing a private loan with a variable rate. Those rates currently start at about 3%. With the Federal Reserve not expected to raise interest rates through at least 2014, parents can expect rates to remain low for the next two years, says Mark Kantrowitz, the publisher of FinAid.org.
This route is best for those who are confident they will be able to pay off student loans in the next couple of years, planners say, due to the risk that rates will start to rise and borrowers will be saddled with higher monthly payments.
Options for private loans, however, are shrinking. There are now 22 lenders providing private student loans, down from about 60 before the market crash of 2008, according to FinAid.org.
Fred Amrein, a fee-only financial planner in Philadelphia, is telling parents to consider tuition-installment plans, which are offered by many schools and allow them to evenly spread out their college tuition costs over the course of the year. The benefit: zero interest, though parents typically have to pay $50 to $100 to set up the plan.
Amrein says he recommends this option to parents who can afford to keep up with the payments. If they fall behind, students might not be able to sign up for classes.
More on SmartMoney and MSN Money:
Why does it take 20 years to pay off a loan? Aren't the folks who receive their degree(s) supposed to make much more money that the rest of us poor schmucks who managed to pay our way by working hard in life and taking risks? Why do I have to subsidize someone else's means to make more money by getting their degree? Are they that much better that they deserve it or were they just ignorant enough to believe that the rest of us would be happy to pay their way?
First of all, why is a parent co signing a loan if they can not afford to pay it back?
Second, Doesn't anyone READ the terms BEFORE they borrow money?
Third, If the kid wants to go to school, THEY should come up with THEIR OWN money or financing.
My wife and I did. We paid for our schooling OURSELVES and are proud we did. Stop breast feeding JR and have him or her stand on their own 2 feet and take care of their issues.
The cost of getting a college education is getting out of control. And for what? So graduates can come out into a job market that is absolutely dreadful? Many graduates are taking jobs that they could have gotten fresh out of high school because they need something, anything to start paying back the enormous burden of student loan debt. The country needs to do something to make a college education affordable and valuable to the up and coming generations.
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