Just when we thought that it could get no worse, it gets worse. Not only is the nation struggling to pay off their student debts — with one-fourth of the graduate population in the hole and a collective national student debt of well over a trillion dollars — but now student loan interest rates are on the rise, too! And what’s even worse: This will be the second year in a row that Congress has raised student loan rates; they are the ones that decide the rates, annually, on July 1.
How does Congress make its decision?
One might ask: Why would the rates not stay level, or, dare I say it, even drop a few percentage points? Why are they on the rise, instead? Well, a few years ago Congress adopted a certain schema or outline for deciding whether or not to raise, maintain or lower the rates. Specifically, it is through something called the 10-year treasury note at the May auction, as well as a fixed rate that depends on which type of loan is being applied for. Assuming the average 10-year repayment plan, this increase will only result in “a couple of dollars [extra]” each month, according to student financial aid expert Mark Kantrowitz.
The upward trend is still worrisome
With a national and individual concern about student debt also on the rise, every dollar truly does count. And with this new trend, students, and parents of students, should think extra hard about whether they want to take out student loans at all — or whether they might want to try to hack it alone. Even if a stronger economy means a higher chance of paying off loan
debts more fluidly and with less difficulty, this is by no means a certainty.
“One way to help manage the student debt burden” according to a New York Times interview with Diane Cheng, associate research director at the nonprofit Institute for College Access and Success, is to avoid taking out large loans outright. According to the Federal Reserve Bank of New York, debtees who have been delinquent on their loans — due to inability to pay usually — remain “at a high level” in the United States.
Overconfidence with loans is an issue, too
It has been found by a new survey on parents with children under 18 from Sallie Mae (which is a private lender of student loans), that, when taking out loans, many parents overestimate how much they will be able to contribute from their savings. Additionally, they tend to underestimate how much they will need to rely on student loan contributions to pay for their children’s college attendance. The study also found that parents, on average, believed that 13 percent of college tuition and expenses would have to be covered by student loans. However, the same study found that parents paid closer to 20 percent on student loans. Parents additionally estimated that their savings would capably cover around a third of college expenses, whereas, in reality, it usually covered closer to 10 percent.
Some good news is that the new higher student loan rates will only apply to new loans being taken out (that is, loans taken out after June 30). Any pre-existing loans will remain at the rate that was agreed upon. Additionally, you don’t need to take out all the loans that you are authorized to borrow. You can always borrow less. Lastly, remember that these inflated rates only will apply to federal student loans and not private student loans. Private loans are always set by the lender at their discretion. Even so, federal loans are generally a better bet. At least, according to Cheng, who argues that, despite the rising rates, with federal loans you are guaranteed consumer protection (such as the option to have monthly payments based on income). Even with lower interest rates, Cheng said, you should be going with federal loans if you can help it.
Takeaway
While just a few measly percentage points may not seem like anything to be up in arms about, the trend is still a bit unnerving, especially considering how deep America is already in the debt hole to student loans. The new trend may necessitate the returning to the question of whether it is better to be more conservative with how many loans you take out (if you can help it, that is). However, if you have no choice but to take out loans, despite rising interest rates, usually a federal loan is better than a private loan.
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