How Interest Rate Increases Will Impact College Loans This Year
You have probably heard that the Federal Reserve raised short-term interest rates by 0.5 to 0.75% in December, 2016, but this is only the beginning. There are 3 more potential rate hikes projected for 2017, and likely more beyond that.
For parents who have become accustomed to the low-interest climate of the past decade, these changes may be a rude awakening for those planning on relying on student loans to help pay for college in the coming years.
This chart from NICCP.com lists the current student loan interest rates and fees:
|Loan Program||Interest Rate||Loan Fee Points|
|Direct Subsidized Stafford Loans||3.76%||1.068%|
|Direct Unsubsidized Stafford Loans||3.76%||1.068%|
|Direct Graduate Stafford Loans||5.31%||1.068%|
|Direct PLUS Loans||6.31%||4.276%|
The new rate hikes will kick in for student loans after June 30, 2017.
Keep in mind that if you have chosen a PAYE, or REPAYE program, these income-based loan payoff programs usually will not be impacted by interest rate changes – at least until the student reaches a certain income level.
However, if your family is carrying a Federal Family Education Loan (FFEL), you may be impacted – but you do have a few options to minimize the impact of the increasing costs for borrowing:
1. Consider Refinancing
If you have student loans already that have high interest rates, now would be a good time to refinance before the rates increase further during the second half of this year. Lower rates may become hard to find, so don’t wait too long to lock in at a lower rate (see next point).
2. Switch to a Fixed-Rate Loan
If you have current student loans with a variable rate, be prepared to see increases later this year. If you are able, and even if your loan is currently carrying a low interest rate, you may want to consider refinancing and replacing your variable-rate loan with one with a fixed rate.
3. Switch to An Income-Sensitive Repayment Plan
Keep in mind that income-sensitive repayment plans are not available for loans in the Direct Loan program. Only borrowers in the Federal Family Education Loan (FFEL) program can qualify. The formula for determining the monthly loan payment amount under income-sensitive repayment can vary from lender to lender, but usually, the payment is based on a fixed percentage of gross income, between 4 percent and 25 percent. An income-sensitive repayment plan is usually best for borrowers with low-income or financial difficulty, but it is another potential way to avoid the impact of rising interest rates on your student loans.
Need help planning for the high cost of college? Attend one of our FREE local workshops to find out what you need to know! Or contact us today for a no-cost individual consultation and learn how we can help your family plan and pay for college – without hindering your retirement goals.