The interest rate for federal student loans is to increase by almost 2 percent on July 1, leaving students wondering whether they should fix their loans at existing rates.
By consolidating existing loans into a single loan, students can lock in their loans at present rates. Consolidation, however, means that students lose their six-month-after-graduation grace period to defer repayments. Also, students who have consolidated their loans could find themselves stuck with a higher rate if interest rates fall.
Understandably, some students are confused.
“I haven’t been able exactly to understand what’s going on and why,” said Sharron Wright, a junior in management and finance who has Stafford loans. “I’m very upset because I’m back in school after 30 years and on Social Security disability, so there’s no guarantee that that my health will be good enough for me to go back to work and pay off all this extra interest,” Wright said.
The rates for Stafford loans and PLUS loans will increase by 1.93 percent, marking the first hike in federal student loan rates since 2001 and one of the largest increases in the loan program’s 40-year history.
Stafford loans, the most common loan for students, will increase to 4.7 percent for students in school or within the six-month after-graduation grace period. Students in repayment, or out of school for more than six months, will see their interest rates increase to 5.3 percent. Parents helping finance their children’s education using PLUS loans will face interest rates of 6.1 percent. Many experts predict that next year’s rates may rise even higher with continued economic growth, said Leonard Gude, director of financial aid at USF.
“The good news is that interest rates are still comparatively low,” said Mike Fischer, director of the Florida Student Association. “Everybody’s known that interest rates were going to go up July 1, so I’m hoping that students were able to plan for its coming and make the necessary adjustments in their lifestyles.”
Lenders have bombarded students with mail about consolidating their loans, and it presents a great option for many, said Martha Holler, spokeswoman for Sallie Mae, the nation’s leading private education lender, managing a portfolio of about $112 billion of education loans.
“I think the question right now is not so much whether to consolidate but when, how and what loans,” said Holler.
Students submitting a consolidation application before midnight June 30 can avoid these increases by locking in their loans at present interest rates, which reached all-time lows last year — 2.77 percent for students receiving Stafford loans, 3.37 percent for former students repaying Stafford Loans and 4.17 for parent borrowers. Interest rates for Perkins loans, a fixed-rate loan distributed by USF to the neediest students, will remain at 5 percent.
Approximately 60 percent of USF undergraduate students use loans to finance their education, said Douglas Anderson, coordinator of financial aid at USF. Those students owe an average of $17,300 upon graduation, said Anderson.
A $17,300 loan at the current 2.77 percent Stafford interest rate repaid over 10 years accrues $2,744 in interest payments. With the rate increase, interest payments would increase to $4,799, a difference of $2,035. The difference increases substantially with a greater principal or longer repayment schedules.
Though the potential exists for considerable savings, consolidation comes with disadvantages, said Gude.
“Unfortunately in the press right now there’s this big emphasis on, ‘hurry up and consolidate before June 30 so you get locked in at the lower rate,'” said Leonard Gude. “But that may not be in the best interest of every student. It will benefit some students, but it may adversely impact others.”
Loss of the six-month-after-graduation repayment grace period is a substantial drawback, said Gude. Students uncertain if they can begin repayment immediately after graduation should keep this in mind, said Gude. Also, students who change to a longer payment schedule during consolidation face increased interest payments over the life of the loan although they receive the benefit of lower monthly payments.
Only nine working days remain for students interested in consolidation. Interested students should contact their lenders immediately, said Holler. Students interested in avoiding the interest-rate increase should speed up the process by submitting online applications, an option provided by Sallie Mae and other private lenders.
“If you’re thinking about applying and you want to do a paper application, you need to act now,” said Holler.
Most federal student loans operate on a variable interest rate recalculated by the government each July 1, using a formula based on the auction value of U.S. treasury bills, said Gude. The laws governing federal student loans mandate this change but allow students the option of locking in their loans at the present interest rate through consolidation.
However, the future existence of that option appears murky, since Congress proposed changing the consolidation loan program from a fixed interest rate to a variable interest rate starting July 1, 2006. So this year may represent students’ last chance for fixed-rate consolidation.
Wright said she has discussed her situation with her lender and decided that consolidating her loans was not the best option for her.
“I’m not going to do it,” said Wright. “If I consolidate, then rates may go back down and I’ll end up paying more.”