Rising rates, rule changes boost costs

By Kristin Davis
Washington Post
College costs keep spiraling upward, and now the cost of borrowing to pay for higher education are spiking, too.

Students and their parents have taken comfort in a half-decade of ultra-cheap college loans, loading up on debt to cover the bills. About 8 million people borrowed $60 billion this year in education loans issued or guaranteed by the federal government.

Now a combination of rising interest rates and legislative changes to the student loan program are altering the student loan landscape. Rates on existing Stafford loans -- the bedrock government-guaranteed student loans that 44 percent of full-time undergraduates rely on to pay tuition bills -- change annually and are pegged to 90-day Treasury bills. For the second year in a row, T-bill rates have jumped nearly two percentage points, taking Stafford loan rates along with them. Last June, rates on Stafford loans in repayment stood at 3.37 percent. As of Saturday, they topped 7 percent.

There's more: Under legislation Congress approved in 2002, rates on all new Stafford loans issued after July 1 will carry a higher, fixed interest rate of 6.8 percent. (Rates on older loans will continue to float.)

The new fixed rate means student loans will seem cheap when market interest rates are high and expensive when they're low.

``It definitely scares me,'' says Jordan McNerney, a senior at George Washington University, who expects to face payments of about $1,000 a month on $85,000 in total debt when he graduates in a year. ``That's basically doubling my rent when I get out of school.''

When Stafford loans are not enough, some 800,000 parents each year take out government-sponsored Parent Loan for Undergraduate Students, or PLUS loans, which can cover up to the full cost of college. Rates on those loans are also pegged to Treasury bill rates and will experience similar increases, to 7.94 percent from 6.1 percent on existing loans. New PLUS loans will have a fixed rate of 8.5 percent for most borrowers.

To cope with this ballooning education debt, more families have been turning their student loans into mini-mortgages, stretching payments out over 20 or even 30 years. That keeps the monthly payment low but also increases the loan's total cost.

Many also have been taking out consolidation loans to refinance the debt. That converts them from variable-rate loans to a fixed-rate loan.

Thanks to recent legislation, borrowers can consolidate their loans with any lender, no matter who holds their current loans. Until now, the so-called single-lender rule forced borrowers to stick with their current lender if all their loans originally came from that lender.

This is the last hurrah, however, for borrowers who are consolidating before they are done borrowing. Last year, Congress changed the rules so that beginning in July, borrowers will no longer be able to consolidate their debt while the student is in school.

Even without the rules change, consolidation is likely to become a less attractive option because new loans will have fixed rates.

Consolidation loans were designed to help students who need payment relief, so they automatically extend the length of your loan, which can wind up costing more overall because of the extra interest payments.

Once the rush to consolidate is over and the new, fixed rates take effect, parents may want to look for alternative loan sources before they commit to a PLUS loan.

Aside from second mortgages or home-equity credit lines, borrowers can also shop among private lenders for rates that may be below 8.5 percent.

One silver lining: Despite the rate increases, student loan rates are still historically modest.



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