Tag Archives: interest rate

The Impact of the Potential Cut to Subsidized Student Loans

24 May

Casey Doten, Financial Aid Administrator – Purdue University

The newest federal budget proposal has proposed reductions to several federal student aid programs including cuts to Pell Grants, Work Study, and ending the Perkins loan program, Federal Supplemental Education Opportunity Grant (FSEOG), Public Service Loan Forgiveness, and subsidized federal loans to students. This budget proposal in its current state would have a direct financial impact upon any student with financial need, not just those in the lowest income brackets.
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Ending subsidized federal loans would likely have the widest impact of the proposed cuts as there are currently over 29 million borrowers of these loans.

Subsidized loans are one of the most common forms of financial aid available to students who demonstrate financial need. They differ from unsubsidized federal loans because interest does not accrue on them while the student is still in school. If a student takes out a $3,500 subsidized loan their freshman year, it will still be $3,500 when they leave school while an unsubsidized loan would have accrued an extra $612 of interest in that time.

The difference becomes more stark when you compare subsidized versus unsubsidized over four years. A student taking out the maximum in federal loans each year for four years would borrow $27,000, of which $19,000 is subsidized. That student would have $27,785 of debt when leaving college versus a student who only had unsubsidized loan (which is what the budget proposal would lead to) would owe $29,353 when entering their grace period on the exact same amount borrowed, with the exact same interest rate.

Once a student begins repayment, all of that accrued interest gets added on to their loan balance and further gathers interest. For a student using the most aggressive payment plan, they will pay $2,081 more over the life of the loan because their loans were not subsidized.

Keep in mind these figures use interest rates from the past several years. Since student loan interest rates are keyed off treasury bonds rates, if the economy were to increase at the rate projected in the budget then student loan interest rates raise even higher as treasury bonds interest increases. This would further exacerbate the difference between subsidized and unsubsidized loans.

While graduating in four years is considered the norm, only 36% of students pursuing bachelor’s degrees do so. If a student takes even one more year to get their degree, the time for their interest to accrue becomes even greater. Loans for these students who can receive subsidized loans totals $32,341 on graduation, while unsubsidized-only adds up to $35,305. These two groups have a $3,513 difference in the life of the loan.

All told, subsidized loans would collectively save the 29.5 million current borrowers $45.5 billion assuming they all graduated in four years. That number only grows higher when realizing that many students take more than four years to graduate.

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.

Which Private Alternative Loan is Right for You?

29 Apr

Leo Hertling, Associate Direct Financial Aid Services and Operations – Purdue University
www.purdue.edu/mymoney

As we progress through the semester, some students are getting a bill asking for the next payment on tuition or for a payment in full.  This financial headache on top of living expenses, cell phone bills, etc.  When there isn’t enough in your checking or savings account to pay off everyone that you owe, how will you make it through the semester without working a full-time job and going to school full-time?  Oh and you have to maintain at least a 2.0 cumulative grade point all at the same time.Migraine

Before you begin looking at private loans, you should consider exhausting all of your federal eligibility for grants and loans. If you have not exhausted your federal eligibility or do not know what your federal eligibility is, you may want to contact your institution’s Department of Financial Aid. If you have fully maximized your ability for aid with the Federal and state assistance programs, and still have a sizeable balance due, then you may need to consider the use of a private alternative loan.  But which one is right for you?

If you search the internet for Private Alternative Loan, you will get about 4.5 million hits on Google in a little under ½ second.  I don’t know about you, but I don’t have the time to look at all those pages to see what is out there.  Not to mention that I have no idea who is reputable and who is not.  So how can you tell what lender to choose to satisfy your needs?

Let’s go back to basics:  Who does your family bank with?  What lenders do you know and trust?  Are there lenders that you don’t trust?

If none of the banks your family works with have a private student loan program, you may want to take a look at some of the online resources for lists of student loan lenders.  Purdue offers a list of lenders that our students have used in the past.  You can also receive a list of national private student loan lenders from finaid.org.

Why choose a private loan?

pockets inside outPrivate loans may be a financial alternative after all other sources of aid have been explored and found to be lacking.  If you find yourself in a situation where you are unable to cover the rest of tuition, living expenses, are unable purchase educational supplies, and borrowing is not possible through a Parent or Graduate PLUS loan, then a private student loan may be right for you. There are times when a private loan may have a lower interest rate than the current Parent or Graduate PLUS loan options.  Usually these loans have variable interest rates.  Be sure to review the borrowing conditions of the loan to determine the amount of variability in interest rates over time.  With variable interest a loan can start low and affordable, but the interest rate could increase significantly making payments unaffordable in the future.  A loan of this sort could adversely affect your future and wreak havoc on your finances.

A private loan may be the proper route for you to follow if you have been denied federal assistance due to a lack of progress toward your degree.  Many private lenders will funds to you regardless of how well you are currently doing in school.

Things to look at before choosing:

A private loan is in your name (and your co-signers name) solely and does not have a guarantor backing the loan; this is different from your Federal student loans.   In most cases, lenders tend to be conservative business men and women who like the idea of being paid back the money they loaned you.  If you default on the note, the lender will be left holding the note, with no recourse but to try to collect the money from you or your estate. Unlike other loans, educational loans cannot be dismissed in bankruptcy litigation. As a result, most lenders require a student with limited credit history to obtain a co-signer before they are considered for a private loan.  Your co-signer should be someone with a good credit history; this way, if something happens to you, they have someone to go to when trying to collect on the promissory note.   Even if you have very good or well established credit, you may want to consider using a co-signer for you loan.  Often lenders will give a lower interest rate or better terms simply because you applied with a co-signer.  Be sure to discuss lending options with your cosigner, they should have an equal say as to whom the loan is borrowed through since, in essence, they are borrowing the loan too.

Processing time from the start of the loan application to the disbursement of the loan also needs to be considered when investigating private loans.  The borrower needs to stay on top of communication between themselves, the lender, the co-borrower, and the institution they are attending.  It may take as long as 5 weeks to get the private loan in place at your institution.  By immediately responding to any queries sent to you by your lender, you may be able to cut this down to 2 weeks, but it will still not be faster than borrowing through the federal loan program. If you know you will need a private loan, the best practice is to apply early, finish all required steps by your lender, and keep the institution you are attending informed of where you are in the private loan process.

When choosing a lender, you will want to look at the terms and conditions of the loan.  The terms and conditions spell out the basics of a loan such as:  interest rates, origination fees, and repayment terms. Find multiple trusted lenders that offer private loans and compare the terms and conditions of each lender. Many lenders have multiple private student loans; find the one that best fits your need. percentage

Most loans will have a variable interest rate but there are a few with a fixed rate.  If you choose to take a loan with a fixed rate, you may have a rate that is much higher than if you had selected a loan with a variable rate.  On the other hand, if you select a variable rate loan, your interest rate may be lower than the fixed rate, either at first or for the entire repayment period depending on the economy.  The interest of a variable rate loan will be based upon a set variable like the current Prime (WSJ Prime 3.25%) or LIBOR (.78%) rate plus a margin.  The margin will vary from +0% to as high as the lender feels is necessary to adequately cover its risk exposure.   The better the credit of you and your co-signer, the lower the margin will tend to be.   The margin will remain in place for the life of the loan while base variable will go up and down as interest rates go up and down in the economy.  Review the terms and conditions of the loan you are considering to review the variables you may be facing.  Also look to see how often the interest rate will be recalculated and if there is an interest rate cap of any sort.

Origination fees:

Origination fees are fees that are assessed; you pay them, but never see the money.  A front end origination fee is where the lender takes a portion of the loan, a set percentage as defined in your terms and conditions, off the top.  A lender with a 2% origination would take $2 for every $100 borrowed.   The problem is that if you need $100 you need to borrow $103.  Some lenders will offer you a lower interest rate in return for paying an origination fee.

Term of the loan: 

The term of the loan is the period over which you will pay the loan back.  When does it begin?  Are you expected to make payments while you are in school?  Some lenders expect you to repay the interest on the loan even while you are in school or at least make a monthly token payment to assist in covering the interest that is accruing.   Other lenders would not require you to make any payment until you enter repayment.  Federal government student loans will normally be amortized over 10 years.  This will not be the case for your private loans.  Many of them have a repayment period of 15 to as much as 25 years.  While this sounds great remember the longer the period the greater the amount of interest.  It may make it easier on your monthly pocketbook to take a longer repayment but you may wind up paying 2 -3 times as much over the life of the loan.  You will also want to review the terms of the loan to see if there is an early repayment clause.  You can forecast the cost of your debt by using PayBackSmarter’s online calculator.

Borrower benefits

Does the lender give you an interest rate discount because you have an account with them?   Do they offer a benefit if you sign up for auto-debit where the loan will be automatically drafted from your bank account on the same day every month?   Some lenders will offer a discount if you let them do this.

Ultimately, it comes down to choosing the loan that makes the most sense to you and your co-signer given your projected income and possible income growth.

Have additional questions about whether borrowing a private / alternative loan or whether it is the right option for you?  Please feel free to contact the MyMoney at Purdue team at mymoney@purdue.edu or (765)494-5050 for more help. mymoney-alt.jpg

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