Federal Student Loans are Getting More Expensive This Year

15 May

Casey Doten, Financial Aid Administrator 

College can be an expensive investment. So it makes sense that many students have to take out loans in order to fund it. Unfortunately, borrowing federal loans for the 2017-18 just became a little bit more expensive.

The interest rates on all federal loans went up 0.69% for the 2017-18 school year. So undergraduates taking out Federal Direct loans for 2017-18 will be paying 4.45% on their loans, up from 3.75% in the 2016-2017 school year. This also impacts other types of federal loans: graduate Direct loans will increase from 5.31% to 6%, and PLUS loans for parents and grad students will increase from 6.31% to 7%.Interest rate increase.png

So how much more does this interest rate increase cost you?

A freshman taking out the federal limit of $5,500 in unsubsidized Federal Direct loans for the 2017-2018 school year will be impacted by the new, higher interest rate. Compared to those freshman who started a year before, the 2017-2018 freshman will accrue $161 over their four years of college, (plus their post-graduation grace period) before they even begin making loan payments. For a student who doesn’t take 15 credits every semester, that number will only grow higher.

Once repayment begins, interest is also applied to that $161 that accrued while the loan was in deferment. So that extra 0.69% in interest ends up costing $456 more over the life of the loan if the student uses the standard 10-year payment plan, which has the lowest total interest paid. The grand total repaid at the new, higher interest rate is $8,134 on the original loan of $5,500.

Unfortunately, this means paying $456 more than students who began only one year earlier for the same loan.

Keep in mind that this change only impacts loans which are being taken out for the 2017-2018 school year. Any federal student loans already taken out and disbursed before July 1, 2017 will not be effected by this change.

However, variable interest rate private loans from previous years may also be increasing. While the change in federal loan interest does not cause private loans to change, they both calculate their interest rates based off the Treasury Department’s auction of 10-year notes. This means that when federal loan interest rates rise, old private loans with variable interest rates can similarly expect to see an increase.

If you want to calculate your own loans for the 2017-2018 year, use a two-step process:

  1. Input your loan information into the Accrued Interest Calculator along with how many months until repayment begins (this is often years until graduation plus three months). This will give you the loan’s balance when repayment begins.
  2. Plus those loans into the Federal Student Aid repayment calculator and see what your repayment is, including information on the different payment plans available.

Even with the higher interest rates, Federal Direct loans are almost always a better option than private loans. They typically have lower interest rates and more flexible repayment plans to go along with fixed interest rates.

While this increase in interest shouldn’t dissuade you from making the investment in your education, hopefully it gives you the opportunity to think about how much you may borrow. Anything borrowed has to be paid back, with (higher) interest.

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