If you are following the news, you probably know that interest rates on Stafford student loans in the US just doubled from 3.4% to 6.8%. Congress was unable to come to an agreement to keep the rates at the same level.
But what does this mean for the typical college student with a student loan? Here are the six key things to realize about these new student loan rates:
1. Not All Student Loans are Affected
The only rates that are changing are on new, federally subsidized Stafford loans. Those types of new loans will indeed see an increase in interest from 3.4% to 6.8%. Rates on any existing subsidized Stafford loans will stay at the old rate. Rates on new and existing unsubsidized loans are locked in at 6.8%. Private loans differ, so if you have private student loan debt, you need to check those rates carefully.
2. The Amount You Pay Each Month Won’t Double
When an interest rate doubles, it sounds really bad, but it is not as awful as you might think. Most of your loan payment goes towards the principal. On a typical 10 year loan, the monthly payment might climb by 15% or so.
3. Many Borrowers Were Not Affected
Only around 20% of undergraduate students leave college with any subsidized Stafford loan debt. The typical size of the loan debt for people with these loans is about $9,000, or about $11,000 for those who earn their bachelor’s degree. Based on this amount of debt, the typical loan payment may increase by about $18 per month, or $24 per month for someone who earned their bachelor’s degree.
4. You Don’t Have To Make Payments Immediately
Many of the new borrowers will not get their loans until the fall of 2013, so they will not see any rate increase until that time, and even in that case, they may not be affected for years. There is not any interest charged when the student is still in school, so the higher payment will not have to be paid until after graduation.
5. Student Loan Rates Could Drop Back Down
If Congress is able to reach an agreement later this year, the lower interest rate could be made retroactive to July 1, 2013. Some think that the government will lock in the old 3.4% rate retroactively for the next two years, if Congress can reach an agreement. However, any retroactive change would apply only to a loan that has not been actually disbursed by the US government.
6. College Costs are a Bigger Concern
Costs of getting a college education have been increasing faster than inflation for decades. Some believe that one of the reasons for this is that the federal government makes federal loan funds easily available to most state colleges. This, in theory, makes it easier for universities to increase tuition. Regardless of the interest rate on a student loan, if you have a loan principal of tens of thousands of dollars, you may find the payment to be difficult to make even with zero interest. This means that you really should do all you can to minimize the amount of money you borrow to go to college.
If you have a new, federally subsidized Stafford loan, keep the tips above in mind to reduce your stress!
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