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.



https://www.thestudentbox.com/Rising-rates-rule-changes-boost-costs.php

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Lock in low student-loan rates

By Marshall Loeb, MarketWatch
Last Update: 4:07 PM ET Jun 16, 2006

NEW YORK (MarketWatch) -- Attention college students, recent grads and their parents: Interest rates on federal student loans are set to jump on July 1. You have just two weeks to consolidate and lock in a lower fixed rate.

If the above reads like an advertisement from a loan consolidation company, it's because my e-mail has been flooded with offers over the past month. Consolidation is big business even for giants like Sallie Mae and the U.S. Department of Education itself. But the catch here is there is no catch. The ads are pretty much dead-on.

Interest rates on federally subsidized loans like Stafford and PLUS are reset every July 1 and this year will rise substantially. Stafford loans will go to 6.8% from 4.7% or 5.3% and PLUS loans will go to 8.5% from 6.1%.

By consolidating you can lock in a rate based on the weighted average of your outstanding loans. And since the repayment period will be extended from, say, 10 years to 15 or 20, your monthly payments will drop substantially in addition to the interest-rate savings.
"I would say for 80% of people it's a slam dunk," says Stephen H. Joyce, director of student aid at Bowdoin College in Brunswick, Maine.

Seniors, recent grads who still have substantial debt and parents paying off PLUS loans all stand to save thousands.

Who shouldn't consolidate? Students still in their first three years of school, when more loans, and thus separate monthly payments, are imminent, says Joyce. He also recommends against consolidating Perkins loans, which come with special deferments and forgiveness.

Some things to watch out for: By consolidating students give up the six-month grace period that starts at graduation and the ability to consolidate in the future since student loans may only be consolidated once. With a June 30 deadline to submit your papers, there isn't much time to shop around, either.

Rates are set by the federal government, so you'll get the same deal wherever you go. But some companies offer little benefits that others don't, such as interest rate reductions if you automatically debit your checking account each month. Ask your college's financial-aid office for recommendations.

If all your loans are with one lender, you used to have to apply to that lender first. But a new law signed this week allows those borrowers to shop among all lenders until June 30.
And here's a bright idea: You'll get more time to pay off your debt with a consolidation but there's no penalty for paying it off early. Stick to the same level of payments you have now and you'll save a bundle of money you would have spent on interest over the long term.

https://www.thestudentbox.com/lock-in-low-student-loan-rates-now.php

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