Listen up current and continuing college students: legislation released last year now spells trouble for your interest rates on subsidized student loans. While there’s been quite a bit of back and forth in Congress for the past few years about these rates, we now know they are going to rise for the next year. While this change is inevitable, there are things that incoming freshmen and continuing students can do to mitigate the extra costs they’ll see with these higher rates.
Why Students Will See a Rise in Interest Rates
After several years of back and forth in Congress about whether or not to “double” subsidized student loan interest rates, the changes have been made and now it looks like the rates will start climbing. The reason this is just starting to take effect is because recent legislation dictated that starting in 2014 subsidized loan rates will start fluctuating based on the 10-year U.S. Treasury rate. An article in CNN Money spells out the costs of this increase:
“Based on rates set at Wednesday’s Treasury bond auction, undergraduate loans will likely pay an interest rate of around 4.66% and graduate school loans around 6.21%. That compares to 3.86% for undergraduates and 5.41% for graduates last year.
Freshmen…could pay $2,150 more over the life of the loan than what they’d owe if Congress had kept rates at 3.4%, according to the Institute for College Access & Success. The analysis is based on April estimates by the Congressional Budget Office.
…Rates on student loans are based on the 10-year Treasury note, which yielded 2.61% Wednesday. Rates are capped for undergraduate loans at 8.25% and for graduates at 9.5%.”
These changes in interest rates don’t just affect student loans. According to CNN Money, rates have been kept low due to the Federal Reserve’s purchase of Treasury bonds – a practice that is slowing down. This rise in interest rates means that student loan interest rates are expected to continue to increase in the coming years.
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What Students Can Do to Keep the Cost Low
With all of the news lately on the high cost of going to college, many have been questioning the validity of using college as a means to reach professional success. However, the news of this student loan increase doesn’t mean all prospective students have to give up their dreams to avoid student debt. All investments come at a risk, but there are ways to mitigate that risk. Here are some things students can do before they graduate to keep the cost of their student loans as low as possible:
Research the option of consolidation. Even if you’re years away from graduation, you’ll want to keep an eye on the news and legislation regularly in order to understand your options in the coming years. For example, a recent bill introduced by Massachusetts Senator Elizabeth Warren would allow students to consolidate at the rates from 2013 – including both federal and some private loans (a first in student loan debt history). Given the constant rise of student loan debt and the dialogue around the topic, you can be sure to see more bills like this make their way into the public debate in the years to come.
Get your finances in order now. Interest rates, the economy, and the job market – these things are essentially what decide your financial future. And they can change at any time. College graduates in 2007 had their choice of copious job opportunities and high pay. Just one year later, the class of 2008 graduated into the worst American economy since the Great Depression. Unless you’re majoring in economics, these changes can come with little to no warning, which is why it’s imperative to build a healthy financial picture now.
How can you do that? Even if you’re only working part-time, save at least 15-20% of your income each month. Put that money aside in an emergency fund that you absolutely refuse to touch.
Once you have an emergency fund that can float you for several months if need be, then divert your savings to a retirement account. Yes, it sounds crazy to think about retirement before you’ve even graduated college – until you do the math on compound interest. Even saving a tiny bit each month now is more beneficial than doubling your savings ten years from now.
Finally, open up a secured credit card so you can start building credit without running the risk of balances growing out of control. While it is important to have a good credit history, opening credit cards is a risk. That’s why the slow credit building game of a secured credit card is a safer choice than taking out a standard credit card. The better your credit when you graduate, the lower you’ll pay in interest for things like a car and the higher your likelihood of obtaining an apartment and even refinancing your student loans, if that’s an option that makes sense for you in the future.
News of increasing student loan interest rates is never a good thing. But it is an important lesson in how changes in the economy can have a direct effect on your financial picture – a lesson best learned as soon as possible. By doing all you can to protect and build your finances, you’ll ensure that changes like this don’t throw you off track.
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