As college costs spiral upward, the cost of borrowing to pay for higher education is about to spike, too.

Students and their parents have benefited from a half-decade of ultra-cheap college loans, loading up on debt to cover their bills. About 8 million people borrowed a total $60 billion this year in education loans issued or guaranteed by the federal government. Now, only those who act quickly can keep a lid on the cost of that debt.

A combination of rising interest rates and legislative changes to the student loan program will alter the student loan landscape on July 1. Rates on existing Stafford loans - the government-guaranteed student loans that 44 percent of full-time undergraduates rely on to pay tuition bills - change annually and are pegged to 91-day Treasury bills. For the second year in a row, T-bill rates have jumped nearly two percentage points, taking Stafford loan rates along with them. Last June, rates on Stafford loans in repayment stood at 3.37 percent. On July 1, they will top 7 percent.

There’s more: Under legislation Congress approved in 2002, rates on all new Stafford loans issued after July 1 will carry a higher, fixed interest rate of 6.8 percent.

Rates on older loans will continue to float. Student advocates pushed for the change at a time when rates were rising to simplify the student loan program and to fix the rate at its historical average. In return, lenders retained an interest-rate formula that ensured student loans would be profitable in the intervening years.

The new fixed rate means student loans will seem cheap when market interest rates are high and expensive when they’re low.

“It definitely scares me,” says Jordan McNerney, a senior at George Washington University, who expects to face payments of about $1,000 a month on $85,000 in total debt when he graduates in a year. “That’s basically doubling my rent when I get out of school.”

When Stafford loans are not enough, some 800,000 parents each year take out government-sponsored Parent Loan for Undergraduate Students, or PLUS loans, which can cover up to the full cost of college. Rates on those loans are also pegged to Treasury bill rates and will experience similar increases, to 7.94 percent from 6.1 percent on existing loans. New PLUS loans will have a fixed rate of 8.5 percent for most borrowers. (Starting next month, graduate students will also be eligible for these loans.)
Rates can be locked in

To cope with this ballooning education debt, more families have turned their student loans into mini-mortgages, stretching payments out over 20 or even 30 years. That keeps the monthly payment low, but also increases the loan’s total cost.

The way to really pay less interest overall is to lock in the lower rate and then pay on the original 10-year schedule. There is no penalty for prepaying. If paying over 10 years is impossible, borrowers can consider boosting payments later on, when their financial situation improves.

Many also have taken out consolidation loans to refinance the debt. That converts them from variable-rate loans to a fixed-rate loan. But they must act quickly: To lock in current rates, applications must be filed by June 30. The easiest way is to apply online.

Thanks to recent legislation, borrowers can consolidate their loans with any lender, no matter who holds their current loans. Until now, the so-called single-lender rule forced borrowers to stick with their current lender if all their loans originally came from that lender.
Alternatives out there

This is the last hurrah, however, for borrowers consolidating before they finish borrowing. Last year, Congress changed the rules. Beginning in July, borrowers will no longer be able to consolidate their debt while the student is in school.

But there is a catch to consolidation loans: Because they were designed to help students who need payment relief, they automatically extend the length of your loan, which can wind up costing more overall because of the extra interest payments.

Once the rush to consolidate is over and the new, fixed rates take effect, parents may want to look for alternative loan sources before they commit to a PLUS loan. Aside from second mortgages or home-equity credit lines, borrowers can also shop among private lenders for rates that may be below 8.5 percent.

One silver lining - Despite the rate increases, student loan rates are still historically modest. “The interest rates that have been around for the last three years are an anomaly,” says Sarah Bauder, director of financial aid at the University of Maryland. Two decades ago, when parents of many of today’s college students were taking out their own student loans, rates of 8 to 10 percent were the norm.

Of course, those borrowers didn’t have to cope with today’s college costs.

Source: The Washington Post

This entry was posted by Taman Siswa on Wednesday, June 21, 2006 at 12:43 am and is filed under College Loans. Tags: College, College Loans, Education News, Financial Aid, Loans, Student, Student Loan, . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.