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The Guru's Blog

Federal Loan Costs Just Went Up

Monday, June 18, 2018

Except for the 60 or so colleges and universities that have "no loan" policies, most financial aid packages include student loans.  Federal loans are call Stafford loans and can either be interest deferred, which means interest doesn't accrue until 6 months after a student graduates, or non-deferred, which means either students pay the interest each year or it is rolled back into principle until graduation.

The interest rate on Stafford loans are updated each July and reflect changes in 10-year Treasury Note interest rates.  This year, the interest rates rose from 4.45% to 5.05% on Stafford loans.  That's a 13% increase in a single year!  According to the New York Times, this is expected to increase monthly payments by around 2.8%. For graduate students eligible for the Stafford loan, the interest rate rose from 6.0% to 6.6%, a 10% increase.  The interest rates on PLUS and Direct Plus loans that parents and professional students pay rose from 7.0% to 7.7%, another 10% increase. 

These loans are not cheap!  In addition to hefty interest rates, there are loan fees to consider as well.  For Stafford loans, the fee is 1.066% while for PLUS loans, the fee is a whopping 4.264%.  That means when you borrow $1,000, you are really only getting $957.36 to pay tuition. These fees may rise when they are next adjusted October 1st.

Since interest rates are expected to rise over the next few years, it is very important to consider how much you can safely borrow without putting your future on hold after you graduate.  I urge all of my students to strongly consider net (actual, after aid) cost when they make their decisions on which school to attend.  If Drexel's net cost is $20,000 less than Penn each year, is the prestige of an Ivy League education really worth $80,000?  For some, the answer may be "yes," if they believe that Penn can offer educational or employment opportunities not available at Drexel.  For most students, the answer is most likely "no."  And if parents have to borrow expensive PLUS loans to cover the additional cost, that difference isn't $80,000, it's a whole lot higher.



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