If you are like me along with the 12 million other college attendees who will be taking out student loans this coming fall, there have been some important changes to be aware of. On July 1st, Congress failed to come up with a plan for setting interest rates on student loans. This allowed for the interest rate of Direct Subsidized loans to double from 3.4% to 6.8% but kept the Direct Unsubsidized loan interest rate at 6.8%
Yesterday, the House of Representatives passed a bill that changed the Stafford Direct Subsidized and Unsubsidized interest rates for the coming school year. The bill was passed in the Senate last week and President Obama is set to sign it in the next couple of days. Undergraduate students who take out federal student loans this year can expect a fixed interest rate of 3.86% on both the subsidized and unsubsidized loans. This rate is tied to the rates of 10-year Treasury notes plus an additional 2.05% and these rates are locked in for the life of the loans. The rates are a little bit higher for graduate students as well as parents who intend on taking out loans for their kids.
These new interest rates are appealing to take advantage of, especially if you are eligible for the Direct Unsubsidized loan. They offer a low, fixed interest rate which is less risky than the variable interest rates that are offered by private lenders, but borrowers beware…
As appealing as these low and fixed rates are, lending in the future may cost you more. If the economy begins to improve more, the interest rate on the 10-year note will increase which will increase the interest rate of student loans. Luckily, the new bill sets a cap as to how high they can get at 8.25% for undergraduates. An article from Time Magazine states that Congressional researches believe the interest rate next year could be up to 4.62% and as high as 7.25% in 2018. With average student loan debt sitting around $24,000, an interest rate of 3.86% and 7.25% is a difference of paying $5000 in interest versus almost $10000 in interest.
So what can you do? Be knowledgeable about what you are getting yourself into. Your student loans are a debt you will have to repay in the future so stay on top of them. Check how much interest you have accrued monthly if have any unsubsidized loans and if you are in deferment. You have the option to make payments towards your loans or interest while you are in school as well. Budget your money and set a goal to save even as little as $20 each month to pay towards your student loans. It will result in lower principal and interest payments over the life of your loans. You should also take advantage of any scholarships that your school or other private institution offers to avoid student loans altogether.
For more information about student loans in general, visit the Federal Student Aid website.