Student loan rates contribute to increased college burden

Financial advisers have some advice on how to pay off student loans, as interest rates rose for a second year in a row

Jul 24, 2018 @ 3:03 pm

By Sarah Min

Rising student loan interest rates will make college degrees even more expensive for Americans who begin taking out new loans starting this month.

As of July 1, undergraduate federal Stafford student loan interest rates increased for the second year in a row, signifying the departure from an era of low interest rates. They increased 13% from 4.45% to 5.05% for the 2018-2019 academic year. Graduate school loans, increased 9% from 6% to 6.6%. These Stafford subsidized loans, the loans with interest rates meant to help students with financial need, are the highest they've been in nearly 10 years.

Federal PLUS loans — which parents take out to pay their students' college bills — increased 8.5% from 7% to 7.6%.

The increasing interest rates on the loans do not make a big difference in the amount students and their families pay each month. In fact, the extra interest on monthly payments will amount roughly to the price of a pizza. The important issue is the total amount families wind up paying for the cost of college and the amount of debt they take on as a result.

"The real problem is that the costs continue to go up and government grants have not kept pace," said Mark Kantrowitz, publisher and vice president of research of Savingforcollege.com. "So the burden of paying for college has shifted from the government to the families more and more."

All these federal student loan programs have caps, which the U.S. Congress imposed so that rates will not increase too much. The direct unsubsidized loans for undergraduates are capped at 8.25%, graduate loans at 9.5%, and PLUS loans at 10.5%. Even with regular increases, none of the caps will be reached for a couple of years, but families and individuals can benefit from taking steps now to take control of their student debt.

(More: "New ways to pay for college")

Shop around

While families often research products and read customer reviews before they make big purchases on Amazon or Home Depot, they don't always apply the same rigor to student loan interest rates. Students taking out loans should educate themselves on where they can get a loan. Not everyone can get the same loan, as they are based on income and need levels.

Moreover, it's important that families and prospective students understand the interest rates, what the repayment schedules are and what the fees are. Is the interest rate a variable or fixed rate? Can the loan be refinanced?

The best place to find information on student loans would be studentloans.gov.

"You're better off sticking to the dot govs than the dot coms when it comes to information," said Sean Flynn, financial adviser and college planning expert at Essex Financial Services, a registered investment adviser.

And when it comes down to it, families can negotiate for more financial aid. Parents and students can go back to colleges and ask for more by explaining what other colleges have offered them.

"As much as we want our students to go to these colleges, colleges on the other side want really good kids, too," said Ken Mahoney, president of Mahoney Asset Management.

Advisers also recommend families consider refinancing some variable-rate loans they may have and locking them in at a fixed rate. While interest rates are rising, they're still low, which means there's no better time than the present to refinance loans.

"This is a great time to refinance loans that have higher interest rates to take advantage of the current low rate environment," Mr. Flynn said.

Families should be trying to minimize their debts as much as possible, Mr. Kantrowitz said.

Borrow less

One key to less debt is saving more in the years before the student attends college by opening a 529 plan.

Also, search for scholarships and grants — free money — as opposed to loans that have to be paid back, advisers said.

There's also an American opportunity tax credit, which reduces the cost of attending college for the first four years by reducing taxes. Students can claim 100% of the first $2,000 in educational expenses and 25% of subsequent expenses. The maximum annual credit per student is $2,500.

"Every dollar you save is a dollar less that you have to borrow and every dollar you borrow will cost about $2 by the time you pay back the debt," Mr. Kantrowitz said.

Take a hard look

If families are borrowing through the Parent PLUS loan program, it might be a sign of having to take out too much money and students should look into ways of reducing college costs. It might require taking a hard look at the school of choice, as well as the student's lifestyle.

"Live like a student when you're in college, so you don't have to live like a student when you're out of college," Mr. Kantrowitz said.

Students can save on college costs, like textbooks, by borrowing only the required textbooks and not the optional ones, and they can save on travel expenses by deciding on the number of times they will be visiting home over the course of the school year. If parents live near the college, students can live at home for the free rent. Students also can figure out whether they can fit in a job over the course of their education.

It could also mean making small choices, either cutting back on dining out with friends, or taking the big step off campus for more affordable housing options. While cutbacks might sound too austere for college living, Mr. Kantrowitz said students should remember that college is for a degree and for a good career, not for a joyride.

After graduation, students don't want to be in a position where they have borrowed so much money that they have to choose a higher-paying job over one that they really want, he said.

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