Student loan debt has tripled as a percentage of total debt owed by U.S. households in less than 15 years, Shahien Nasiripour of Bloomberg News recently reported — https://www.bloomberg.com/news/articles/2017-05-18/student-debt-is-eating-your-household-budget
In 2003, student loans accounted for 3.3% of total household debt, or $240.7 billion, according to estimates by the Federal Reserve Bank of New York. Now that figure stands at ~ $1.3 trillion, or 10.6% of all household debt. The Federal Reserve Bank of Washington pegs that figure even higher at over $1.4 trillion. (https://www.newyorkfed.org/microeconomics/topics/student-debt)
The larger amount of debt reflects higher tuition and campus-related costs as well as declines in state appropriations to public colleges and federal student grants relative to rising college costs. 1 in 6 American adults, 44 million, has student loan debt outstanding.
And student loan debt is only set to rise further as interest rates on federal student loans for the 2017-18 academic year reset on July 1st.
Undergraduate students will pay 4.45% in interest on new Stafford loans, up from current 3.76% rate. For graduate students, the interest rate on new Direct loans will climb from 5.31% to 6.0%. Parents who take on federal debt to help their children pursue a degree can expect to pay 7.0% on a PLUS loan, up from 6.31%. This is comes at a time when interest rates, in general, are quite low – U.S. 10-year Treasury notes currently yield ~ 2.20%.
Because many students and their families have to borrow money each year, continued annual increases could take a significant toll.
The new rates track closely with projections from the Congressional Budget Office, which anticipated rates to top 6 % on undergraduate loans, 7.5% on graduate loans and 8.5% on PLUS loans by 2018.
The government resets interest rates on student loans every year based on the spring rate of the 10-year Treasury note (this year, May 10th the 10-year Treasury was 2.4%), plus a fixed margin (2.05%, 3.6%, and 4.6%, respectively, for Stafford, Direct and Plus loans). Next July’s rates could be higher as interest rates look set to rise, but there are protections for families.
To keep rates on education loans from skyrocketing, Congress has set a ceiling. Interest rates on undergraduate loans are capped at 8.25%, graduate loans are capped at 9.5%, while the limit on PLUS loans is 10.5%. Lawmakers decided several years ago to tie federal student loan rates to the market, rather than setting them.
Even given the higher federal student loan rates, they are still a better bet than private loan rates. And since these interest rates are fixed, they won’t go up later and come with protections such as an income-driven repayment plan that’s tied to a percentage of one’s wages so one can manage their loan repayments.
There are ways to help students and families manage the cost of college, particularly if they don’t qualify for aid, such as federal education tax credits and tax-advantaged savings plans – 529 college savings plans.
If you need guidance on college funding, ask me or one of my fellow advisors in your area how to maximize the bang for your academic buck. Summer is a great time to review contribution strategies, such as 529 college savings plans, for your children or grandchildren to meet these ever-rising educational costs.
“Education is the most powerful weapon which you can use to change the world.” – Nelson Mandela
Lead story, “Student Debt is Eating Your Household Budget,” by Shahien Nasiripour of Bloomberg News, May 18, 2017. Link – https://www.bloomberg.com/news/articles/2017-05-18/student-debt-is-eating-your-household-budget
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