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Thought Your Student Loan Rates Were Bad? – They’re Going #AllTheWayUp
Student debt has long been thrust in the spotlight, maintaining its status as one of the prime issues of contention and debate in contemporary society. And with total student debt coming in at a whopping $1.4 trillion (higher than both credit card and auto loan debt), we are finding that the average individual is roughly $32,000 in student loans with about 70% of students graduating college in significant debt.
It is no wonder that we have found recent deeper scrutiny into the industry with many around the nation wondering how on earth we can change the system.
Unfortunately, the future is not looking too bright. Recent reports have stated that federal student loan rates are only going to continue to remain on the rise with fluctuations beginning to rear their ugly heads as soon as July 1 st of this year. A little over a week ago the Department of the Treasury officially released figures on 2017–20 18 school year loans showing that they are set to increase by .69 percentage points.
According to a recent New York Times article, rates for graduate student Stafford loans will increase to 6% (up from 5.31%) with the rates for their undergraduate equivalent increasing to 4.45% from 3.76%.
PLUS loan rates will also rise to 7% from 6.31%. This means that a $10,000 PLUS loan will have a repayment cost of right around $14,000 over about ten years for those parents looking to help out their young ones and build a successful foundation to their future success.
"If there are a couple of more rate increases over the next several years, a student who graduates with $31,100 in loans at a blended rate of 5.1% would pay $49,672 to repay them over 20 years" a recent Washington Post article quoted.
So… have fun with that. It is no wonder that now more than ever individuals and youth alike are taking the entrepreneurial route and searching to develop a diverse set of skills in order to monetize and develop various streams of passive income.
This periodic annual increase originated back in 2013 due to a "provision signed into law by then President Barack Obama." The president and the then Republican-led Congress decided to establish guidelines based on how the Federal Reserve priced interest rates on student loans.
They decided that they had wanted to move away from the previous system where rates were defined several years in advance and move forward with a system which tied student loan interest rates to financial markets "via 10 year Treasury notes".
Now, depending on who you are, this can be viewed positively or negatively -- however leaving student loan rates and subsequently our children’s futures at the mercy of the volatility of the financial market leaves many questioning how sound the judgment was used to make this decision.
These recent changes are compounded by the new Education Secretary Betsy DeVos's decision to recently reverse plans to consolidate contracts with private financers into a single vendor for the purpose of constructing a new "student loan servicing system".
That’s all done away with – and again, depending on how you view it, this could be a good or bad thing. However, the fact that the stock prices and values of various financial companies rose with the election of our incumbent president leaves us concerned that deregulation is coming full-speed ahead.
If it makes you feel even just a smidge better, Mark Kantrowitz, a financial aid expert referenced for the NYT article made it a point to mention that despite the uptick in percentage points, student loan rates still remain low "compared with the historical average for federal student loans".
Tell that to our bank accounts Mr. Kantrowitz. Tell that to our disposable income – oh wait – we don’t have any.
According to various sources, one legitimate upside to the seemingly bottomless abyss of yuck isthe maximum rate that can be charged on these loans will still remain capped in order to serve as a form of protection to borrows and the loans will also remain fixed-rate as usual.
Also, these rate increases strictly apply to federal loans and are not applicable to private loans, since those are financed by private lenders which are not subject to federal fluctuations.
However, the general downside of using a private lender is that rates tend to be higher and various banks tend to carry varying interest rates of a variable nature, which means they are subject to change and increases over the life of the loan. These increases are generally positively correlated with market changes meaning that as the market rises – so do the rates.
Additionally, many private lenders have gotten into hot water for their targeted and often predatory approaches to borrowers. Many tend not to provide income-based repayment programs or deferred payment options to their borrowers with companies such as Navient, one of the largest private lenders in the industry, having been "prosecuted several times for malpractice, most recently for siphoning nearly $4 billion from millions of debtors."
The private lender came under recent scrutiny by the Consumer Financial Protection Bureau and various state attorney generals for their illegal practices of increasing loan repayment cost to millions. The loan giant had been called out for coaching its employees to push borrowers away from cheaper income-based payment plan options and towards forbearance -- which is subject to significantly higher costs.
Many individuals who had signed up for the forbearance option at the advice of their lender found that they were not properly advised that the costs of the terms tend to skyrocket the longer the payments are deferred.
The loan company was also put under fire for literally neglecting to inform its borrowers that once enrolled in income-based repayment plans they were required to apply for recertification after 12 months.You see, this is quite ironic given the fact that failure to recertify within the required time generally results in monthly payment increases by hundreds of dollars and additionally "delays progress toward loan forgiveness".
And if loan forgiveness is your rainbow at the end of the horizon, good luck love -- because the remaining principal and interest is counted as income, so borrowers will end up with a gigantic tax bill once that day is reached.
This isn't the first time the private lender has been in hot water with the government. Back in 2014 they were fined $60 million by the Justice Department in the Federal Deposit Insurance Corporation (FDIC) for overcharging lenders with a military background illegally.
I’m sorry but is there anyone else in the room wondering how in the heck they are still allowed to be in business?
However, we have another bit of good news: this shift is strictly applicable to interest rates and as of yet will have no effect on borrowing caps – which are determined based on a number of factors such as dependency status and the type of loan being requested.
Undergraduates who remain dependent can still borrow up to the generalized amount of $5500 as a freshman, $6500 as a sophomore and approximately $7500 as a junior/senior.
And another thing to keep in mind --the ceiling. Congress has set a ceiling on interest rates for undergraduate student loans ensuring that rates can never exceed 8.25%. The ceiling comes in at a bit higher for graduate loans unfortunately with the amount capping at around 9.5% and the limit on PLUS loans landing at 10.5%.
Borrowers are also able to take advantage of student loan refinancing in order to receive a lower rates, however the downside with this is that refinancing causes individuals to lose significant options such as income driven repayment plans and loan forgiveness programs.
With college degrees not amounting to what they used to be and our economy shifting evermore into an economy of increased specialization, many are questioning if our degrees are actually worth the paper their printed on. My advice? Invest in a solid standardized test program for your young ones and foster academic success, achievement and talent diversity so that your children can have access to the wide array of grants and scholarships.
Often times the difference between thousands of dollars of debt and financial freedom from student loans is as simple as a part-time job and a whole lot of research into the various opportunities available for financial assistance. Regardless, all in all, the future looks uncertain.