New federal loans for students, parents have lower interest rates
Although the cost of attending college continues to go up, new federal loans for undergraduates, graduate students and parents have fallen.
For example, the rate on federal loans for undergraduate students fell to 3.76 percent, from 4.29 percent last year.
“How much you pay in interest does matter. It affects how much you ultimately will pay on the loan,” said Lauren Asher, president of The Institute for College Access and Success in Oakland, Calif.
In another move by the federal government to make college more affordable, the maximum Pell grant has been increased. Unlike student loans, Pell grants do not have to be repaid.
The maximum Pell grant was adjusted for inflation to $5,815 as of July 1, up from $5,775 last year. Pell grants help nearly 8 million lower income students pay for college and limit how much they need to borrow.
Student debt for college graduates is at an all-time high of $1.3 trillion, spread out among about 43 million borrowers, according to Student Loan Hero, an Austin, Texas-based company that works with borrowers to pay off and refinance their student loan debt. The company estimates the average Class of 2016 graduate has $37,172 in student loan debt, an increase of 6 percent from last year.
Interest rates on federal student loans are set in May of each year based on the rate paid by the 10-year U.S. Treasury note.
While the lower rate this year will translate to lower monthly payments for borrowers, the savings won’t be substantial, said Mark Kantrowitz, publisher of Cappex.com, a Chicago-based website that connects students with colleges and financial aid.
A rate reduction from 4.29 percent to 3.76 percent for a 10-year term amounts to a savings of $2.52 a month for every $10,000 borrowed. Over the 10-year life of the loan, the savings will total $302.50 for every $10,000 borrowed.
“It’s not a lot of money, but it’s better to have costs go down than up,” Kantrowitz said. “I expect in the future we will see rates rise again. So you should take advantage of this while you can.
“If you want to further reduce your interest rate, you can sign up for auto-debit where monthly loan payments are automatically transferred from your bank to the lender,” he said. “The federal government will reduce your rate by 0.25 percent as an incentive.”
Interest rates on federal loans are fixed for the life of the loan. Someone who attends college over multiple years will likely have several loans set at different interest rates.
Part of why it is important to have access to federal student loans is that they come with repayment options, loan forgiveness programs and borrower protections that private loans do not provide.
Federal loans come with income-based repayment plans, which keep payments more manageable, and they provide a light at the end of the tunnel for borrowers with large balances. Federal loans can be forgiven if borrowers are still making payments after 20 years or 25 years — depending on which program they are in.
Borrowers who work for public or nonprofit employers could qualify for loan forgiveness after only 10 years of repayment.