Student loan changes are a bit like fireworks. Both arrive every July, and both can easily burn you — if you’re not paying attention. For many borrowers, that may seem like the case this month.
As the Student Loan Ranger has previously written about, the U.S. Department of Education recently put on hold the updated borrower protections originally expected to go into effect this month. That delay may affect those with existing debts, but borrowers taking on new federal student loans got some bad news as well — those loans are about to get more expensive.
[Read the Q&A that unpacks the borrower defense rules postponement.]
New Interest Rates
Per the Higher Education Act’s guidelines, federal student loan interest rates change each year on July 1. At that point, they are reset and fixed for a yearlong term — from July 1 through June 30 — using a formula based on the 10-year Treasury rate and variables for different types of loans and student borrowers.
This means that new interest rates for direct Stafford and PLUS loans went into effect on July 1. And after a year with the lowest rates in more than a decade, loans issued between July 1, 2017, and June 30, 2018, will have interest rates that increased by 0.69 percent.
Undergraduate direct subsidized and unsubsidized Stafford loans went from 3.76 percent for the July 1, 2016, to June 30, 2017, time frame to 4.45 percent. Graduate direct subsidized Stafford loans have increased from 5.31 percent this year to 6 percent, and Direct PLUS loans increased to 7 percent from 6.31 percent.
Interest rate hikes will always earn negative headlines. But how much will these changes actually cost borrowers?
[Ask these 3 debt questions when picking a college.]
Let’s consider a fourth-year undergrad who borrows the annual Stafford loan maximum of $5,500 in subsidized funds. Under last year’s interest rate, a $5,500 subsidized loan would cost $6,607 overall if repaid with the standard 10-year, 120-payment plan. Under this year’s rate, that amount rises to $6,824 — a difference of $217 over 10 years or about $1.80 more a month over those 120 months of repayment.
Those numbers increase slightly with unsubsidized funds, which start accruing interest that the borrower is responsible for from their disbursal date . An unsubsidized Stafford loan of $5,500 accrues approximately $201 in interest over 365 days at a rate of 3.76 percent.
With a rate of 4.45 percent now, that amount rises by about $44 to $245. Combined with the $217 mentioned before, that monthly impact shifts to about $2.18 more each month.
When put in this context, these interest rate increases won’t have a large effect on individual student loans. Still, for borrowers who already stand to graduate owing record levels of debt, it can be difficult to accept anything that adds to their total.
Managing Loan Costs
So, what should borrowers do if they’re still worried about higher interest rates? The best option is to take that interest out of the equation as much as you can. For those with unsubsidized loans, that means paying the interest that accrues on those loans while you’re still in school.
That may sound impossible, considering your other costs, but again, dig into the math. As mentioned above, a $5,500 unsubsidized loan now accrues about $245 in interest a year. To pay that amount off before it’s added to the amount you owe — and before you start paying interest on your interest — you’d have to save just $20 a month over the course of the year.
If your loans are subsidized, go through the same savings exercise. Trimming your balance by $245 to $5,225 means you’d repay $6,483 over 10 years. That amount is not only significantly less than the $6,824 you would have otherwise paid, but it’s also more than $100 less than the total under last year’s lower interest rate.
[Read about student loan repayment myths that are debunked.]
New Origination Fees
Interest rates aren’t the only student loan update this time of year. The origination fees on federal student loans also change each year, though their timing is a bit different from interest rates — these go into effect from Oct . 1 to Sept . 30 each year.
Lenders take an origination fee out of the loan amount when they disburse it, so the amount you borrow isn’t actually the amount you receive. Instead, you get the loan proceeds after the lender receives its origination fee. You still repay the entire loan amount, though.
For federal student loan borrowers, the news is better when it comes to this year’s origination fees: They will decrease. And while that sounds nice — especially compared with rising interest rates — the impact of this change is minimal. These rates are dropping just a fraction of a percent.
The origination fees for direct Stafford loans for 2017-2018 will be 1.066 percent, compared to 1.069 percent this past year. For direct PLUS loans, the fees drop to 4.264 percent from 4.276 percent.
If you borrowed that $5,500 Stafford loan mentioned before, you would have received $5,441.20 last year after the origination fee. For the upcoming year, that changes to $5,441.31 — a difference of pennies. Still, when it comes to student loans, every cent counts.
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New Student Loan Interest Rates Cost Borrowers Little originally appeared on usnews.com
