Student Loan Interest Rates Had a Recent Boost for You

Congress acted earlier this month to freeze interest rates on federally subsidized Stafford loans at 3.4 percent for a period of one year, averting a doubling to 6.8 percent.  If you are about to pay a college tuition bill, this posting has information for you. 

Keep in mind that this decision only affected subsidized Stafford loans for undergraduate students; unsubsidized loans have carried an interest rate of 6.8 percent since 2006. Unfortunately, graduate students lost their eligibility for subsidized Stafford Loans entirely.

A growing problem is that subsidized Stafford Loans cover less than one-third of total borrowing for education. As a comparison, subsidized Stafford Loans explained more than one-half of education loans in 1995.

The difference between subsidized and unsubsidized loans has to do with who is paying the interest while the student is in college. In the case of traditional unsubsidized loans, interest is accumulating and being added to the loan balance whereas the government is paying the interest on a subsidized Stafford loan from inception to graduation.

Subsidized Stafford loans (maximum $3,500 for a Freshman, $4,500 for a Sophomore, $5,500 for a Junior, Senior and fifth-year undergrad) are based on financial need. Unsubsidized Stafford loans are not based on financial need.

Beyond Stafford Loans, Direct PLUS (Parent Loan for Undergraduate Students) loans are available at a fixed rate of 7.9%. Loan availability requires a credit check.  The annual borrowing limit is equal to the student’s cost of attendance (minus other financial aid). These loans are not deferred until graduation; payment begins 60 days after loan proceeds are disbursed.

Private college loans have variable interest rates based on a margin above either prime or LIBOR (London Interbank Offered Rate). The margin depends on the borrower’s credit history. Some loans may have fees as well as interest charges. Typical rates (including the margin) are between 8.0% and 15%.

Also keep in mind that the other major difference is that private loans do not protect students in difficult financial circumstances after graduation. Private loans do not contain the deferment and forbearance provisions many students use to keep loan payments manageable with their federal loans.

Here is the amount of college financial aid money is available each year.

In 2010-11 (the most recent data available), $227.2 billion in financial aid was distributed to undergraduate and graduate students in the form of grants from all sources ($119.3 billion), federal loans ($89.5 billion) and federal tax credits, deductions and Federal Work-Study ($18.4 billion). In addition, students borrowed an estimated $7.9 billion in loans from state and private sources.

We have a proven method for comparing the different financial aid offers you receive from all of colleges that sent your child an acceptance. Our method clearly separates grants from loans and shows a range of total net cost of college from lowest to highest.

If you want to create a system on your own make sure you read up on these differences and are comparing apples to apples. Choosing the right school for your budget is an important factor and should be considered along with location and social atmosphere.