There has been a lot of talk in the news recently about student loan interest rates. There has been a lot of misinformation surrounding what is going on with the rates. What are the facts? FOX 4’s financial expert Kathy Stepp explains.
Congress must vote to establish the student loan rate for federally subsidized Stafford loans. The rate changes almost every year. From 2008 through July 1st of this year, the rate was 3.4 percent. Beginning July 1, Congress voted to increase the rate to 6.8 percent.
Only undergraduate students that are taking out new federally subsidized Stafford student loans after July 1st are affected by the increase. To qualify for federally subsidized Stafford loans you must display financial need. The change in interest rate does not affect existing federally subsidized student loans for students and alumni.
If you qualify based on financial need, then you can get a loan where the government pays the interest while you are in school. This type of loan is a federally subsidized Stafford loan. That is a great deal for borrowers! That means you are borrowing the money for FREE during the time that you are in school. These student loans also have flexible repayment options. For example, if you lose your job, you automatically qualify for a deferral of payments for 3 years.
The bottom line is that it costs money to borrow money — and the interest rate is the price that you pay. The federally subsidized Stafford loan really is a good deal for students that qualify, even with the rate increase for new loans. Otherwise, if you want to borrow the money for your education your options are unsubsidized loans where the interest accrues while you are going to school.
There are several options for unsubsidized federal loans for students and parents. You can also get private student loans that are issued by banks. The interest rates on private student loans are much higher than federal loans, the rates are often variable, and there are no flexible repayment options. Often times you must begin repayment while you are still in school and your payment is based on the loan balance and interest rate, not your income or whether or not you are working or in school like federally subsidized loans.
If you don’t want the government to control how much interest you pay for student loans, there are lots of alternatives. Parents and grandparents can make the choice to start saving early for their children’s education. Parents and grandparents can put money away tax free into a 529 Plan account. The earlier that you start, the less you have to save on a monthly basis. Students can work throughout high school and save their earnings for college. Students can also work part time while they are in college to help pay for expenses. Students should also work with the financial aid office at the schools that they are interested in attending to find out what grants and scholarships are available to them. There are also a lot of great resources on the internet for finding college scholarships.
