Borrowers of student loans can’t seem to catch a break. As of July 1, 2013, the interest rate for the Federal Stafford Loan to help pay for college has doubled. In addition, the Budget Control Act of 2011, also known as sequestration, forced Congress to drastically cut spending in education and other domestic programs. With all these impediments to low-cost education, what choices do students have to get federal financial aid or private funding? How will you pay back your loans?
Interest rate on Stafford Loans doubles
The interest rate on federal subsidized Stafford Loans has doubled from 3.4% to 6.8%, the same rate as unsubsidized loans. This means the average student will have to pay $3,000 more in interest on a $23,000 loan if paid off in 10 years. Roughly one-third of students obtaining federal financial aid get a Stafford Loan. Many members of Congress don’t like this rate hike, so a vote to extend the current 3.4% rate for another year is scheduled for July 10.
Student loans affected by sequestration
Another force affecting student loans is sequestration, which was enacted last year to force Congress to reduce the overall federal debt. But with the lawmakers unable to come to any decision, the drastic reductions in federal spending have kicked in. For education, that means that as of January 1, 2013, the sequestration will remove $4.1 billion from the Department of Education. In addition:
- Direct Subsidized or Direct Unsubsidized Loan fee will increase from 1.0% of the principal amount of a loan to 1.051 percent.
- Direct PLUS loan fixed interest rate of 7.9% will go up 0.2%, and the loan fees will rise from 4.0% to 4.204%.
- Federal work/study programs would lose $82 million and affect about 683,000 students.
- TRIO programs would lose $71 million and affect 67,000 students.
- Pell Grants are safe from the sequestration cuts, but only for fiscal year 2013.
“The pending cuts would arbitrarily take education backwards,” … said Kim Anderson, NEA’s [National Education Association] director of advocacy, reported in the August 16, 2012 article, “Automatic education cuts loom on the federal horizon,” by Charles Dervarics in Diverse Issues in Higher Education found on Questia.com. “The cuts would decimate education programs,” said Antonio Flores, president of the Hispanic Association of College and Universities. “We have to invest in education, and we can’t do it on the cheap,” he said.
Loan options for students
According to the Chronicle of Higher Education, 60% of college students borrow money to cover college-related expenses. Students usually choose between federal and private loans for that money. Student debt today is more than $1 trillion, of which $864 billion is from federal loans and $150 billion is from private loans, reported American Progress.
In “All loans are not equal,” by Steve Delperdang in the BaylorLariat.com April 26, 2013, student Steven Bell preferred federal loans. “I think federal loans are easier to deal with because there’s more resources available to answer questions and help you along the way,” Bell said.
Tips on paying off high student loans
If you’re forced to now pay more for a student loan, whether federal or private, here are some tips:
- Use a student loan calculator to determine how much you’ll be paying
- If you can, pay more on the principal per month or make payments every two weeks
- Choose direct deposit to help lower your interest rate
- Consider a loan consolidation
- Create a budget to save money and put more toward your loan to pay it off faster
- Get another part-time job
- Look into the new version of the income-based federal student loan repayment program. “The ‘Pay as You Earn’ program will allow eligible student-loan borrowers to cap monthly payments to 10 percent of discretionary income, and have their loans forgiven after 20 years,” reported Justin Pope in “Feds: new student loan repayment options set” a post in the HuffingtonPost.com December 6, 2012. Eligible borrowers must qualify for financial hardship, and the program applies to certain direct federal loans, not private loans.
Will you need financial aid this year? Are you concerned about the higher interest rates on federal loans?