Doubling Interest Rates: The Devil is in the Details | 07.25.13

Last night, the Senate passed a bill to address the doubling of the interest rate on new subsidized Federal Stafford loans.

The Congressional Budget Office (CBO) estimated that the legislation will save the federal government $715 million over ten years, which would be applied to deficit reduction. Many feared that the multi-partisan Senate deal would fall apart because the CBO found that an earlier version would cost $22 billion over ten years.

Under the Senate-approved legislation, interest rates on new loans each July 1 would be based on the last 10-year Treasury auction in the previous May. The specific interest rates would be as follows:

  • Undergraduate Students (Subsidized and Unsubsidized Federal Stafford Loans): 10-year Treasury + 2.05% with an 8.25% cap
  • Graduate and Professional School Students ( Federal Stafford Loans and Federal Grad PLUS Loans): 10-year Treasury + 3.6% with a 9.5% cap
  • Parents (Federal Parent PLUS Loan): 10-year Treasury + 4.6% with a 10.5% cap

Based on the current 10-year Treasury rate, this would yield interest rates of 3.9%, 5.4% and 6.4%, respectively, for new loans this year, made after July 1, 2013.

According to Mark Kantrowitz, publisher of Edvisors, “This is still an interest rate increase masquerading as a decrease. Interest rates are at historically low levels and have nowhere to go but up. We can expect interest rates to start increasing by about 1.5% per year in 2015.” These federal educational loan rates are expected to climb as the economy improves and it becomes more expensive for the government to borrow money. Thus, interest rates on new loans will probably exceed the current 6.8% rate in 2017 and certainly by 2020. “So, while students enrolling in college now will save money on their student loans, their younger siblings will pay a lot more. A few years from now students and parents will be demanding a return to fixed 6.8% interest rates.”

This student loan interest rate debate is more about the politics than the policy. It is a distraction from the real problem, which is the amount of debt, not the cost of the debt. On the same day the Senate negotiators crafted the current compromise, the Consumer Financial Protection Bureau reported that federal education debt alone has reached the $1 trillion milestone. Previously, the combination of federal and private student loans had reached $1 trillion. See http://www.consumerfinance.gov/speeches/student-debt-swells-federal-loans-now-top-a-trillion/

The failure of grants to keep pace with increases in college costs shifts more of the burden of paying for college from the federal and state governments to students and their families. Federal grants have decreased on a constant dollar per-student basis. State appropriations have likewise decreased for decades. Cuts in state appropriations are the primary driver of public college tuition inflation. Family incomes have been flat for a decade, forcing families to either borrow more or shift enrollments from higher-cost colleges to lower-cost colleges, such as from 4-year colleges to 2-year colleges (or to skip attending college altogether). This causes a reduction in Bachelor’s degree attainment, since only one fifth of students who intend to obtain a Bachelor’s degree but start at a 2-year college obtain a Bachelor’s degree within six years, compared with two-thirds of students who start at a 4-year college. These effects are felt most by low- and moderate-income students, who are increasingly being priced out of a college education.

So what are a student and his or her family to do?

Kantrowitz offers the following practical advice:

Save before college. Even if you start saving late, it will still save money. Every dollar you save is a dollar less you’ll have to borrow. Every dollar you borrow will cost about two dollars by the time you repay the debt.

Search for scholarships on free web sites like studentscholarshipsearch.com and scholarshippoints.com. Every dollar you win is a dollar less you’ll have to borrow in the form of a loan.

Use tuition installment plans to avoid long-term debt. These plans spread out the college bills into 9 or 10 equal monthly installments. So if you can afford to pay the college bill, just not all at once, these can make it more affordable while avoiding high loan interest rates.

Use education tax benefits, such as the American Opportunity Tax Credit, to reduce your tax bill based on amounts you spend on tuition, fees, and textbooks.

Live like a student while you are in school, so you don’t have to live like a student after you graduate. Tuition and fees are only half of college costs. Living expenses, including room and board, books and supplies, transportation and personal expenses are the other half. There are many ways to save besides enrolling in a less expensive college. You can live at home if you enroll at a nearby college or get a roommate to split the rent. Buy used textbooks or sell your textbooks back to the bookstore at the end of the semester. Visit home less frequently to save on travel costs. Minimize non-campus dining and entertainment costs. Students don’t like the cafeteria food, so they eat out or buy beverages from vending machines and specialty coffeehouses. A $10 pizza a week will cost $2,000 by the time you graduate, and if you use student loan money to pay for it, it will cost about $4,000 by the time you repay the debt. That’s a lot of pizza.

The Senate version of this interest rate legislation will be sent back to the House for approval before its August recess. The House of Representatives is expected to act quickly on the legislation (HR 1911).

Mark-Kantrowitz-EdvisorsDavid Levy is Associate Editor of the Edvisors Network. David brings 30 years of experience as Director of Financial Aid at some of the nation’s leading colleges, including the Scripps College, California Institute of Technology and Occidental College. He is respected by students, parents and financial aid professionals nationwide because of his extensive outreach and volunteer activities, his extensive knowledge of financial aid and his leadership in helping to simplify the aid application process.


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21 Responses to “Doubling Interest Rates: The Devil is in the Details”

  1. William Topel says on September 4, 2013 at 1:38 am:

    I wish the Congress would have passed Sen. Elizabeth Warren’s bill to require that the Federal Reserve fund the federal student loan program. Why should students pay more for federal loan money than the banks do when the banks get the prime rate for borrowing? Under her bill, this federal student loan money would not be paid for by the taxpayers, but by the Federal Reserve, which is basically unaccountable to Congress & the public anyway (that’s way Congressman Ron Paul had been advocating for years for there to be an audit of the Fed), yet they not only print our nation’s money supply, but also buy U.S. Treasury securities, which enables, along with foreign investors who do the same (notably Communist China), the continuation of our federal government, since our federal government cannot keep its own spending under control, as our national debt is now almost $17 trillion dollars.

    Reply To This Comment
  2. ahambsch says on August 30, 2013 at 12:31 am:

    David,

    Thank you for the this infomration

    Reply To This Comment
  3. laquita says on August 21, 2013 at 1:07 am:

    yesss lawd, amen!

    Reply To This Comment
  4. Erin F. says on August 20, 2013 at 4:22 pm:

    I’ve avoided college loans like the plague just for fear of something like this happening, in favor of taking time off classes to work and pay my own way through. It’s worth delaying school for a while in order to avoid a burden of debt that may plague you for decades.

    Reply To This Comment
  5. Zachary McDonald says on August 15, 2013 at 8:55 pm:

    I have been applying for scholarships with this place for about a year now, and sure hope something comes through soon.

    Reply To This Comment
  6. Shayla Cardenas says on August 15, 2013 at 10:26 am:

    This is great advice that I will certainly take. I am incoming freshman so everything is all new to me.

    Reply To This Comment
  7. Debbie Jackson says on August 15, 2013 at 4:14 am:

    thank you Government for making me decide not to further my education after my current schedule ends

    Reply To This Comment
  8. megan says on August 12, 2013 at 7:21 pm:

    Thank you for giving great financial a dive. Much needed.

    Reply To This Comment
  9. Cassandra says on August 12, 2013 at 5:28 pm:

    If my school had more than a Subway to eat at, I wouldn’t have to buy something from a fast food place just to get a meal in. I’ve done everything I necessary for scholarships and have yet to receive anything. It’s unfortunate but I have come to terms with the fact I will need to take out loans.

    Reply To This Comment
  10. Betty says on August 10, 2013 at 8:49 pm:

    I can’t see that the % is all that much more than what I have been paying on my student loans and I graduated
    12/2010. A few are low but the majority are 6.4% and up to over 8%.

    My advice is to make certain you 1st file for a FAFSA loan then go with an unsubsidized Federal loan. And simply cut back on your spending & work part-time for extras.

    Or get a Private loan and you can spend it on everything & anything you need.

    Good luck to all. NOW I need $$ to get my Masters Degree – which I really really need… so far no luck.

    Reply To This Comment
  11. Elexis says on August 10, 2013 at 2:03 pm:

    Doubling interest rates not only restricts students from going to college, but cripples the economy. Students, such as myself, cannot afford to take out loans not alone pay them back with sky-high interest rates. I will be taking steps to let my voice be heard.

    Reply To This Comment
  12. Raymundo says on August 9, 2013 at 2:53 pm:

    keep us informed because I have problems with financial aid and now I have to pay almost all of the books with money from my pocket and I hope it helps students

    Reply To This Comment
  13. Ursula C says on August 8, 2013 at 5:34 pm:

    Could you please direct us to any analysis of why college costs have soared over the last decades? I read somewhere that the percentage increase for college costs is over double the increase in health care costs. Thank you!

    Reply To This Comment
  14. jakeetah says on August 8, 2013 at 5:02 pm:

    I am a parent and I certaintly hope that you all may continue to inform us of the financial changes so that we may be aware of what affects us as parents & children as they try to finish college .

    Reply To This Comment
  15. Joy Kennedy says on August 8, 2013 at 4:54 pm:

    Good Advice.

    Reply To This Comment
  16. Diana Goin says on August 1, 2013 at 11:57 am:

    Hello Mr. David Levy,
    thanks for all you do to keep students well inform. the information is very helpful.

    My daughter is an undergraduate student who will go to college this fall. The school had offered unsubsidized loan at 6.8% interest rate, but since the senate is going back and forward playing around with our minds; I’m still waiting on them to reconsider interest rate.
    the question is: if my daughter accept the loan right now August 1-2013, what would be the interest or it would be better for her to way till last minute. what would you recommend?

    Thanks in advance for your help

    Diana Goin

    Reply To This Comment
  17. Jim Briggs says on July 25, 2013 at 4:29 pm:

    David, good to see your post with good financial ideas for families.

    Reply To This Comment
  18. Jim Briggs says on July 25, 2013 at 4:27 pm:

    David, good to see you post here. Congrats on our position and for spreading good financial ideas to families.

    Reply To This Comment

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