Reduce The Sting of Student Loan Interest Hikes

While several democratic senators including Elizabeth Warren are coming up with new bills in order to let student borrowers refinance their student loans to the current rate, federal student loan interest rates will be increasing by 0.8% on July 1st, 2014 for college students and parents in the 2014-2015 school year. Why is this happening? Well the reason for this is increase is because the student loan rates are adjusted annually based on a set amount above the 10 year federal treasury note interest rate. When the treasury rate rises, then the student loan interest rates rise as well, and by the same amount.

The rate hike could affect 4 groups of borrowers:

1) Students who have not consolidated their older loans

2) Undergraduates borrowing new loans

3) Graduate students

4) and parent PLUS loan borrowers.

Note: Students who have loans that were originated with a fixed interest rate are not affected.

For instance, if you borrowed money at 6.8 percent interest rate, the rate hasn’t dropped. If you took out a federal student loan the rate is still at 3.86%. If you were wondering what you could do to minimize the damage of this inevitable increase on your wallet, we have got you covered.

Here’s how each group can minimize pocketbook damage from the increase:

Borrowers with loans issued disbursed between July 1, 1998 and June 30, 2006.

If you have any pre-2006 loans where federal student loans weren’t set at a fix rate, consolidate before July 1st. This way you lock in a rate of 2.375 (2.35 rounded up to the nearest 1/8 %). This is the rate for undergraduate and graduate subsidized and unsubsidized loans in repayment status. Otherwise, your rate will likely increase on July 1st. Until your loans are consolidated your rate changes annually. The new interest rate for these older loans will be released in the next two weeks. You can always wait until after the rate is official announced to consolidate your loans. The rate won’t officially change until July 1st.

Undergraduate Students Borrowing New Loans.

Interest rates are going up by 0.8% for new loans. There really isn’t anything students can do about the increase, but there are strategies to reduce the impact. Families should take this as an opportunity to discuss why student loan borrowing should be kept to a minimum. Parents should discuss whether students should spend their student loan refund checks, the money left over from student loans after tuition and fees. Also, this is a good time for families to consider paying the interest on unsubsidized loans while the student is in school. Subsidized loans don’t accrue interest while the student is in school.

Graduate Students and Soon-to-Be Graduate Students

If continuing on to graduate school, don’t pay off undergraduate loans before earning your advanced degree. Unsubsidized graduate school loans are borrowed at a rate of 6.21 percent, while last year’s undergraduate loans were issued at rates under 4%. Also, there are no subsidized graduate school loans. The other consideration for graduate students is minimizing Graduate PLUS loan borrowing. Since PLUS loans can be borrowed up to the full cost of attendance, graduate students can easily rack up $50,000 to $100,000 in PLUS loans. Don’t do it. Minimizing PLUS loan debt doesn’t mean working full time during grad school. But it does mean comparing textbook prices, state versus private school programs, and housing costs. Plus loan rates will rise on July 1st to 7.21%.

Parent Loan Borrowers

Parents will see a rate spike as well on their new loans to 7.21%. In How To Make Sure Your Dream College Doesn’t Turn Into A Student Loan Nightmare, I talked about how parent PLUS loan borrowing can add up fast. It’s tempting for parents to want to pay for every dollar of their children’s education, but don’t go into a $100000 of debt to do it. Your kid can transfer to a cheaper school or potentially find scholarships. Calculate your potential payments every semester using the Repayment Estimator calculator on the Federal Student aid Website. Make sure every dollar you borrow or your kids borrow is both worth it and affordable to repay.