As you know by now, the interest rates for Federal Student Loans doubled on Monday from 3.4 percent to 6.8 percent. While it may be very easy (and maybe even a little fun) to blame one political side or the other, students and parents should take a deep breath today and try to put all of this into perspective. The increased rate will only add about $3,000 to the life of the average four year loan over the repayment period. Also, it was only just a few years ago that students, parents, and legislators were fighting for a 6.8 percent loan.
History Of Student Loan Interest Rates
In 2002, Congress lowered the interest rate on Federal Student Loans to 6.8 percent. With a much healthier economy at that time, this was considered a reasonable rate for students and their co-signers (usually parents) to pay for their continuing education. It was tied to the 91 day Treasury bill, so while the rate could drop below 6.8 in the future, it could go up; the top rate was capped at 8.25 percent. This bill passed through the House with a large, bipartisan support and later passed the Senate by unanimous consent; a very rare occurrence in Washington D.C.
It didn’t last for very long, however. Five years later with a new, now Democratic Party controlled Congress in session; the interest rates for Stafford Loans were cut over the next three years until they were 3.4 percent. This was supposed to be only for the 2011-2012 school year, but given the state of the economy, not to mention that it was an Election Year, an extension was quickly passed. Members of both parties in 2007 and again last year were quick to accuse each other of partisanship and dodging a permanent fix to the “problem” of a 6.8 percent interest rate.
Here is what also makes 6.8 percent so high to people who follow the ups and downs of the situation: If the old formula (prior to 2002) were followed, the current Stafford Loan rate should be in the range of only 2.3 to 2.4 percent; that is the Short-Term Treasury Rate + 2.3 percent. This is a full four points below what the rate is now and even less than some of the proposed legislation to fix the “problem”.
Sound The Alarms!
Despite calls of alarm from organizations such as the U.S. PIRG (Public Interest Research Group) and the U.S. Student Association, this may not be the time to panic. Why? Because in 2001, these same groups were pushing for a 6.8 percent interest rate. Back then, it was hailed as a rate that could help middle and lower income families get their kids into college and on the road to the American Dream. On Monday, the PIRG issued a statement that “Congress is pushing student borrowers to their limit”. The U.S. Student Association points to the now $1 Trillion in student loan debt; “We have an affordability crisis and a student debt crisis that has to be addressed.”
There is some truth in both statements. The value of the U.S. Dollar is lower than it was twelve years ago. Families do have to stretch their budgets farther, but an additional $9 to $15 a month in interest payments; which won’t even start to be repaid until four years from now is not going to crush most people as long as they can find reasonable employment. While the economy is still very slow, it is growing; students looking for work in 2017 will presumably face a healthier job market than recent graduates now.
Even so, Stafford Loans and the other Federal Student Loan programs are still the best interest rates for student borrowers for this year and for a long time to come. Depending on the bank, a private four-year loan rate can be four points or higher than a federal loan. The terms of a private loan are rarely as beneficial to students and their parents as with a federal loan.
Students and parents should look at their goals in the same manner as they would if loan rates had not changed three days ago. Both the House and Senate were working on bipartisan plans to not just extend the current loan interest rate, but to put in place a better system to adjust future rates and keep the Federal Student Loan Program available to students and families who need it. Check in here at Student Debt Relief for the latest information as you prepare for the upcoming school year.
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Student Debt Relief Loan Refinancing Advertiser Disclosure
College Ave: College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
College Ave Refi Education loans are not currently available to residents of Maine.
1 – The 0.25% auto-pay interest rate reduction applies as long as the borrower or cosigner, if applicable, enrolls in auto-pay and authorizes our loan servicer to automatically deduct your monthly payments from a valid bank account via Automated Clearing House (“ACH”). The rate reduction applies for as long as the monthly payment amount is successfully deducted from the designated bank account and is suspended during periods of forbearance and certain deferments. Variable rates may increase after consummation.
2 – $5,000 is the minimum requirement to refinance. The maximum loan amount is $300,000 for those with medical, dental, pharmacy or veterinary doctorate degrees, and $150,000 for all other undergraduate or graduate degrees. Information advertised valid as of 04/26/2019. Variable interest rates may increase after consummation.
3 – This informational repayment example uses typical loan terms for a refi borrower with a Full Principal & Interest Repayment and a 10-year repayment term, has a $40,000 loan and a 5.5% Annual Percentage Rate (“APR”): 120 monthly payments of $434.11 while in the repayment period, for a total amount of payments of $52,092.61. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
ELFI: Subject to credit approval. Terms and conditions apply. To qualify for refinancing or student loans consolidation through ELFI, you must have at least $15,000 in student loan debt and must have earned a bachelor’s degree or higher from an approved post-secondary institution.
LendKey: Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
CommonBond: Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate.
Splash Financial: Terms and Conditions apply. Splash reserves the right to modify or discontinue products and benefits at any time without notice. Rates and terms are also subject to change at any time without notice. Offers are subject to credit approval.com
Earnest: To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest’s fixed-rate loan rates range from 3.89% APR (with autopay) to 7.89% APR (with autopay). Variable rate loan rates range from 2.50% APR (with autopay) to 7.27% APR (with autopay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms of 10 years or less. For loan terms of 10 to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 0.26% and 5.03% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of April 23, 2019 and are subject to change based on market conditions and borrower eligibility.
Auto Pay Discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 04/23/19. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice.
Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 303 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, e-mail us at firstname.lastname@example.org, or call 888-601-2801 for more information on our student loan refinance product.