The U.S. Department of Education announced Monday that interest rates on federal student loans would remain at historically low levels — 3 percent — until July 1, 2020.
It’s good news for borrowers, who have seen their borrowing costs erode over the past three years. But it’s a mixed bag for some colleges and universities, which have seen their financial aid packages shrink even while tuition continues to climb.
Students taking out loans to finance their education pay interest while they’re in school; once they graduate, they begin repaying those loans. And because of that, the amount owed grows over time. If the average borrower graduates with $29,400 in debt, after five years of payments, that person could owe about $43,000.
Last year, the department said it was increasing its benchmark rate for subsidized Stafford loans from 4.66 percent to 5.31 percent. That was among the first steps taken since Congress passed the Higher Education Act of 1965, which created the government-backed loan program.
The move came as lawmakers debated how to fund public higher education and college affordability without adding billions to the national deficit. Lawmakers ultimately decided to keep funding free community college unchanged and set aside money to make sure students do not lose access to Pell Grants, the government assistance program for low-income students.
Congressional negotiators settled on a budget deal last month that increased Pell Grant spending by $834 million over current law.
In addition to keeping interest rates at 3 percent, the department said it would continue making automatic adjustments to loan amounts based on changes in inflation. Since 2012, the maximum amount eligible for subsidized loans has been adjusted annually to reflect increases in the Consumer Price Index plus 0.5 percentage points.
That means that if the CPI rises by 2.9 percent, the total amount approved for any given year will increase by 10 cents. So if the government raises the loan cap by 20 cents, a typical borrower would see his or her monthly payment jump by 6 percent.
That hasn’t happened yet, and the federal government isn’t expected to do so before July 1.
But experts say it’s possible that the Trump administration could change the way the department calculates the loan cap.
When Congress passed the Higher Education act of 1965, it gave the department authority to adjust the loan cap to reflect changes in the cost of living. Since then, the department has adjusted the cap based on the consumer price index plus 0.5 percentage point, according to the Congressional Budget Office.
Those calculations don’t take into account the fact that many borrowers use their subsidized loans to help cover living expenses, such as rent, food and transportation. Those costs often rise faster than inflation.
If the department were to calculate the cap based on the CPI alone, it might leave out the biggest drivers of the cost of living. That would mean that borrowers might find themselves paying less for their loans after graduation than they did during school.
One reason the department could decide to change the calculation method is that Congress may not appropriate enough money for the department to meet its obligations under the Higher Education Act.
Rates On Federal Student Loans
Average federal student loan debt per borrower – $29,392 (2018)
Percentage of borrowers whose loans were serviced by private lenders – 22.7% (2016)
Average interest rate on federal subsidized Stafford loan – 4.9% (2018)
Default rates (percentages) – 11.8% (2017), 10.0% (2016), 6.9% (2015)
Total amount borrowed after origination – $1.55 trillion (2016)
Number of borrowers who have defaulted on their federal student loans – 2.7 million (2014)
Percent increase in delinquency rates (2010-2012) – 9.6%, 11.9%, 19.4%
Amount of money awarded annually to defrauded students – $260 million (2013)
Median monthly payment owed on student loans – $352 (2016)
Estimated number of people who are struggling to pay back their federal student loans – 15.9 million (2019)
Maximum allowable federal government salary for someone working full-time without paying off their student loans – $43,950 (2019)
Amount of student loan forgiveness offered each year – $11 billion (2020)
Annual percentage rate (APRs) for income-based repayment plans – 1.5% (2018) *(Note that income-based repayment is not a type of student loan. Income-based repayment is a program that is managed by the Department of Education.)
Monthly payments for an undergraduate borrower under an income-based repayment plan – $253 (2018)
Rates On Federal Student Loans
US government student loans are a great way to finance college education. These federal student loans offer several advantages over private student loans, including lower interest rates and unlimited repayment options. In order to qualify for these loans, students must have earned at least half-time (12 hours) credit toward degree requirements while enrolled full-time.
However, some borrowers may be eligible for additional loan incentives, including subsidized Stafford loans, direct subsidized Stafford loans, and unsubsidized Stafford loans. In addition, there are certain programs that provide low-interest loans to certain groups of students.
If you’re a U.S. citizen who earns less than $50,000 per year and plans to attend school to earn a bachelor’s degree, federal Perkins Loan is an option for you. You may receive this loan even if your family doesn’t meet income restrictions on the need-based portion of the program.
To be eligible for Direct PLUS Loan, you must not already have any student loans. Your parents cannot contribute funds to the loan either.
Undergraduate students are only eligible to apply for both Subsidized and Unsubsidized Stafford loans if they are attending school on campus. Graduate students are ineligible for both forms of federal student loans when they start school.
If you plan to use your federal student loans to pay for postsecondary expenses, such as tuition, room and board, books, fees, and transportation, make sure you know about loan limits. Each year, the Department of Education publishes an annual report that lists the maximum amount of educational debt you can accumulate and still repay after 10 years.
Most undergraduate borrowers should expect to pay an average of $2,500 per year in interest payments over the course of their four years in school. However, you may find yourself paying much higher or lower amounts depending on how long you take out your student loans and what type of loan you choose.
The College Cost Reduction and Access Act of 2007 was designed to help students manage their finances before, during, and after their schooling. In particular, legislation requires schools to calculate the monthly payment amount due on each student loan. That number is then posted on the Department of Education’s website, where borrowers can monitor their progress towards loan repayment.
Private lenders charge higher interest rates than the government does, so they are often recommended for borrowing money. However, private loans do have two major drawbacks — the first being that lenders can require you to sign a promissory note, which means that anything you fail to repay immediately becomes your responsibility. Also, interest rates are generally fixed, meaning that although the lender won’t raise them once you’ve signed the contract, they might increase your rate later on.
Borrowers who use the Income Based Repayment option can spread out their loan payments without having to worry about accruing interest. This option, however, caps your total loan balance at 15% of your discretionary income, so you don’t get to borrow as much as you would under standard repayment.
All of the above factors play a role in determining your monthly payment amount. There are also many other variables that can influence this figure, including whether you’re married, the state of your financial situation, and the value of your house.
Rates On Federal Student Loans
In 2010, Congress approved legislation requiring student loan borrowers to begin making payments at six months after leaving school, instead of 10 years after graduating or enrolling in graduate school.. This change went into effect in July 2011. Borrowers have until June 30, 2015 to make their first payment under the new law.. Many people don’t know about this change; they think they still have ten years to pay back their loans. But many students aren’t aware of the change. To help them understand the difference between what they could expect if they borrowed today versus five years ago, here’s a list of the current federal interest rates on both subsidized and unsubsidized loans.
You’ll notice that the rate that you’ll pay varies depending on whether you’re borrowing from the government or private lenders. If you go to the Department of Education’s website, you’ll find a calculator where you can plug in the amount of money you want to borrow, how long you plan to keep paying back the loan, and your income level to get a detailed breakdown of how much you’d actually pay per month.
If you have any questions about the loan repayment, you can contact the Department of Education’s National Call Center at (800) 433-7300.
Subsidized Loans: Undergraduate Loan : 6.8% Fixed APR (will not change while you are enrolled)
Graduate Loan : 5.31% Fixed APR (no cap – may increase over time)
Loan forgiveness options: Public Service Loan Forgiveness Program or Income Based Repayment Plan (may apply for full program after 120 payments)
Unsubsidized Loans: Same as above – Subsidized Only $20 less than Unsubsidized
Private Lenders: Variable APR based on credit history and type of lender
The following chart shows the federal student loan interest rates for students who started repaying their loans in July 2011, as well as those who began repaying prior to July 2011.
Federal Payment Range: August 1, 2011 to July 31, 2014 | Students who began repaying in July 2011: 2.41% to 8.26% variable APR
Students who began repaying before July 2011: 4.21% to 14.31% variable APR
Note You have approximately seven years to repay your loan, unless you qualify for some sort of forgiveness program. Interest accrues daily, even though you
Rates On Federal Student Loans
$0 – $10,000
10% – 20 %
20% – 30%
50% – 60%
90% – 100%
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