As They Say...It's ComplicatedI
Saying Yes to the Loan with a click of a Button.
It is borderline predatory lending, folks. That’s my position, and I stand by it. I cannot borrow money to buy a car or a home ( both secured loans!) without 2 hours of paperwork. But you can click a button for a federal college loan, and not think about it again. That is, until you get your bill.
It is frightening, no scary, how easy it is to go to your student portal at college or university and click a single button to say YES! to your first, your fourth, or even your sixth yearly student loan package. Who is asking questions about this at ages 18-24? All your college student knows is they have to borrow the money to stay in school. Details later.
Those details are changing in May for all of you returning to or starting college. It just got more expensive. Read this article from NPR. Highlights are mine to help you focus.
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With so much talk these days of when or whether President Biden will broadly cancel student debt – and with payments and interest on that debt paused for more than two years – it's easy to forget that the federal student loan system remains unchanged. And one part of that system is about to deliver a shock to many borrowers: Interest rates are going up, likely by quite a bit.
"We're going to get bad news," says Robert Kelchen, an expert on higher education finance at the University of Tennessee, Knoxville.
Interest rates on federal student loans are fixed, like a mortgage. A student who took out a new, undergraduate loan for this school year got a good interest rate: 3.73%. And that loan will remain at that rate for the life of the loan.
The wrinkle, says Kelchen, is that "every year, interest rates reset based on the 10-year Treasury yield, plus some additional amount," a premium added to help cover the government's costs.
That means borrowers who need help next year will have to take out a new loan at a new interest rate. Federal student loan rates change every May, based on the U.S. Treasury Department's auction of 10-year notes, which is set for May 11, 2022.
And that's bad news for borrowers because, this year, as with mortgage rates and virtually everything else, student loan interest rates are sure to rise.
While we don't know exactly how much they'll rise, we can make some educated guesses by applying some basic math, spelled out in federal law, to the current 10-year Treasury rate, 3.06% at the time of writing.
For example, undergrads' current 3.73% interest rate would jump to 5.1%.
What's the difference between 3.73% and 5.1%? On a loan of $5,500 (the max for a first-year, dependent undergrad), a borrower would end up paying $435 more in interest over 10 years.
The change could have an even bigger impact for graduate students and parents, who are allowed to take out larger loans but at higher rates than undergraduate borrowers (not to mention having to pay a larger loan fee upfront as well, 4.2% vs. 1.1%).
Based on the latest 10-year Treasury rate, interest on loans for grad students is likely to jump from the current 5.28% to around 6.66%, and for parent PLUS loans from 6.28% to around 7.66%.
These loans aren't capped like undergraduate loans and are only limited by a school's price tag, which helps explain why the average yearly Parent PLUS loan tops $14,000. What difference would this potential interest rate hike make on that kind of loan?
Over 10 years, a parent would end up paying an extra $1,194 in interest.
The higher rate for parents, combined with larger allowable debt loads and less generous access to income-driven repayment options, has driven many families to financial ruin.
For potential borrowers wondering if they could do better on the private loan market, "just remember, the federal student loan program is in large part making loans without any sort of credit check. Everybody gets the same terms. It's kind of no questions asked," says Jason Delisle, a senior policy fellow at the Urban Institute.
And yes, Delisle says, "the rate is going to be a lot lower than what you would get in the private market for a similar kind of loan – if you could even find something like it."
To see how much more you might have to pay in interest, there's no shortage of student loan calculators out there, including this one and this one.
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NEWSFLASH- HERE’S THE ANNOUNCED RATE CHANGE.
For borrowers taking out new federal undergraduate student loans starting in July for the 2022-2023 academic year, interest rates will be 4.99%, up from 3.73% for the 2021-2022 school year. Federal loan rates for graduate students will be 6.54%, up from 5.28%. ( THIS ARTICE GUESSED VERY WELL!)
I feel like a broken record. Please don’t follow everyone ELSE down this road to massive student loans! Do it differently. Here’s an idea, and the math to back it up.
My husband booked an early Mother’s Day dinner (no reservations available on THE DAY.) That’S fine with me. We went to an upscale dining restaurant with a seasonally inspored menu. I watched the place fill to 85% capacity and STAY THERE. Yes, we were there less than an hour. But around us were two parties of 10 people, many at 4 or more. The wait staff is seasoned, attentive, and sharp.
This well-regarded restaurant is now open only Wed, Thurs, Fri & Saturday nights. BUT, there are 3-4 flights of patrons EVERY NIGHT! If you worked those 4 nights and averaged $250 per night in tips (pretty low considering restaurant prices these days), you just earned $1,000. That is $4k a month, $48K a year. For Part-Time Work!
You have Sunday, Monday & Tuesday off to catch up, or do a side hustle. In a year, if you can live at home & keep expenses down, you can bank 30-32k. Throw in the 2nd job, and you should have $50k total.
Now you can pay for Community College, (10k including GAS for the year.) easily. Keep working part-time during Community College, and you can pay for your last two years at University (transfers with good grades are accepted at most of our 17 campuses state-wide). By my calculations, you’d still have about 10k left. Your summer hustles should take care of refilling your spending money fund.
That’s what planning a hard-working gap year, plus part-time work during your first two years of community college can do for you around here. It’s a winner for DEBT-FREE College, folks.
Going into debt is NOT the only path to a college degree today. I spend a whole chapter on multiple options in my book, ENOUGH! The College Cost Crisis . I believe it is the best under $20 you will ever spend on this subject.
Once again, a shoutout to my NPR article hunter friend, Tempe Javitz.
Until Next Time,
All My Best,
Bonnie Burkett
