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Student Loan Interest Rate Deal: What Does This Mean for Your Education?


student-loans-building-blocksPublic debate has raged for years about reforming student loans. While the housing crisis, once the only loan debate in town, seems to have somewhat subsided over the last 5 years, student loan debt is “the only form of consumer debt that has grown since the peak of consumer debt in 2008,” according to the Federal Reserve Bank of New York.

With student loan debt topping $1.2 trillion in May, 2013, students, tax-payers, educators and politicians are advocating for a solution to the problem. Recently, congress approved the Bipartisan Student Loan Certainty Act of 2013, a deal aimed at easing the financial burden of higher education for students and taxpayers. The bill has been met with enthusiasm, as well as criticism. The general consensus from education groups (who largely disapprove of the bill) is that students will ultimately pay far more under the new plan than they would have before, despite the low starting interest rate. Still others—including Ohio representative John Boehner, who calls the bill “a victory for students, for parents, and for our economy”—believe the bill is a welcome relief to the student debt problem.

The Bill

On Wednesday, July 24, 2013, the Senate overwhelmingly passed a bill regarding student loan interest rates, aptly named the Bipartisan Student Loan Certainty Act of 2013. The Senate passed the bill 81 to 18, and it was then sent to the House, which passed it with even greater strength, 392 to 31. When the President of the United States recently signed off on it, the bill was retroactively effective July 1, 2013 (meaning it will apply as though it had been passed on July 1).

The bill is relatively straightforward, and represents a step in the right direction for bi-partisan law making, given how easily it passed. It seems both sides of the political spectrum were in favor of the bill (though Republicans were more so than Democrats—17 of the 18 “no” votes in the Senate came from Democratic Senators).

The purpose of the new student loan interest rate bill is to lower the cost of loan repayment for students, while keeping them intrinsically linked to the state of the economy. The theory behind it is that the United States needs to take care of both students and taxpayer’s—help the former, but not at too big of an expense to the latter. While the bill is fundamentally designed to make life easier for students with loan debt, it takes into account the fact that the market in the U.S. ebbs and flows. Ultimately, the politicians agreed, student loan interest should ride the same waves as the rest of the economy, ebbing and flowing with the market.

What are the New Interest Rates?

For this year (as aforementioned, starting retroactively on July 1, 2013), the interest rates for newly issued loans will be as follows:

  • Subsidized undergraduate student loans will be just 3.8%—a large improvement from the previous 6.8%.
  • Unsubsidized Stafford loans will have interest rates set at 5.4%.
  • For graduate students with subsidized loans, the interest rate will be 5.4%.
  • All PLUS loans (for graduate students or parents of students) will be set at 6.4%.

While rates are fixed, they are also tied to 10 year Treasury notes. That means that those taking out loans this year will have a fixed interest rate of 3.86% (for subsidized undergraduate loans), but those taking out loans next year will have a different rate, and so on and so forth. As such, student loan interest will only rise as the economy continues to rebuild itself and overall interest rates rise. There is, however, a cap—meaning that there’s a limit to the amount of interest charged.

Education Secretary Arne Duncan estimates that the bill will save students an average of $1,500 in each loan at the current rate, which is certainly a substantial amount for the roughly 11 million students it would currently affect.

From a taxpayer perspective, this is another win, as the Congressional Budget Office estimates that, over the next 11 years, taxpayers will save $715 million with the passing of this bill (based on the assumption that they will not have to cover amounts owed by students who default on loans).

Why Students are Torn

The deal is an emphatic improvement on interest rates in the short term, since current rates are higher than the ones listed above. Furthermore, all of the repayment benefits remain, such as teacher loan forgiveness. However, critics worry that the interest rates of students’ loans, which are tied to the economy, will go up (beyond what they would have prior to the bill) as the performance of the economy improves.

While current rates still represent historic lows, they will not remain at these levels indefinitely. The bill offers cap provisions (8.25% for undergraduate loans and 9.5% for graduate loans for students) that are meant to keep student loan interest rates from skyrocketing to above 20%. Yet students and educators argue that the caps are higher than the 6.8% rate students would be paying without the bill in place. It stands to reason that a stronger economy, which would trigger higher interest rates, would grant graduates more job opportunities; however, this is not always a certainty, and some students may risk facing a tough job market and higher student loan interest rates.

Last but not least, some opponents of the bill do not believe the legislation solves the student debt crisis in the long-term. Says Massachusetts Senator, Elizabeth Warren:

“I don’t think we should be making profit off the backs of our kids when they are trying to get an education. That’s going to be a big issue. There’s two things we have to do; we have to bring down the cost of college. The cost just keeps climbing, and that’s bad for our kids who need to get an education. The second thing we need to do is we have got to concentrate on a trillion dollars of outstanding student loan debt.”

The rising cost of tuition as whole has, thus far, not been addressed by the student loan deal.

The Future of Student Loans

In the coming months and years, the new student loan interest rate bill will be heavily discussed. And while it is encouraging to see both parties come together to pass a bipartisan law regarding education, it remains to be seen whether this is actually a step forward in the education of our youth.

About the Author:

Today’s guest article comes from Logan Wheeler, a freelance blogger and recent college graduate currently residing in Houston, Texas. When he isn’t learning more about the byzantine rules and regulations surrounding his college loans, he is at work earning his license to become a freight forwarder in Houston.

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iGrad – Repayment Options For Federal Loans (video)


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Student Loans Impact Recent Grads (video)


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7 Predictions – The Gradual Deflation of the Student Loan Bubble


The following is a guest article submitted by Carl Letamendi. He is a PhD student of Conflict Analysis and Resolution with a concentration in Crisis Management at Nova Southeastern University and also holds an MBA in Finance.

I made a prediction about a year ago that things were going to change in the student loan and education industry; based on being a student myself, having recently worked in financial aid and institutional collections, and also in enrollment service. I knew that there were many people out there, taking advantage of current loan programs, who only went to school for the refund generated to them each term as a means of earning an extra income, and some academic institutions were behind them encouraging enrollment based on the amount of refund money from student loans they were going to get. I knew that this would soon come to an end and that congress would catch on; and they did.

There is big news brewing behind the scene that seems to be getting swept under the rug. Effective July 2012, graduate students will no longer be able to get the much coveted Federal Subsidized Loan, which accrues no interest for the student until they are no longer enrolled in school. Although this is of no immediate impact to undergraduate students, those who are in Medical School, Law School, Graduate Business Programs, and any other graduate programs, should be very aware of what is going to happen in the next few years to come.

Being a current PhD student in Conflict Analysis and Resolution and a Finance MBA-grad, whose research interests are in financial and economic anthropology and the dynamics of how people conflict and behave during a financial crisis, I boldly unravel my seven predictions for the near future for the “business” of education and the student loan industry when the student loan bubble starts to slowly deflate, after July 2012:

1) For profit, minimally endowed, and tuition-driven schools will start to close their doors. Over the past few years, we have seen people with mortgages that caved in on themselves that put people under water as well as insurance and financial institutions failing. My prediction is that schools are up next. The notion of the “survival of the fittest” doesn’t just apply to animals and banks as we have recently seen, but we will also soon see it happen with academic institutions. Schools with strong finances, that have made wise investments in the past, and that have a strong network of alumni contributing to their university’s endowment, will survive the gradual deflation of our next bubble (notice I didn’t say “burst”). With schools closing, this also means losses of jobs for those who were working in these for-profit and minimally endowed schools.

2) Fewer graduate students will be able to afford going to school. One of the motivating factors for a student deciding which school they will be attending is the amount of aid they are going to be receiving. If a student has to pay for tuition, or if they are going to be receiving a less favorable financial aid award package, they are less likely to attend that school. Students don’t usually cough up thousands of dollars out of pocket for tuition per term; they rely on scholarships and loans. If there is no money for school, students will probably not be able to afford it; especially if these students are unemployed, and optimistic about graduate school making them more competitive in the job market.

3) Students will reconsider the value of their graduate education. There are a lot of television programs and articles in magazines questioning the value of higher education all together; and showing the incomes of very wealthy non-degree holders. One thing that I advise people who speak parallel to the objective of these articles and shows is that we are in a different time now than at the time when these millionaires became rich. They were innovative, they had ideas, they found niches in the market and societal needs, and met those needs by introducing something new to the world. You can still be innovative while getting an education, but the weight of a high-school diploma in the 60s and 70s is much different than the weight of a high-school diploma in our day and age.

4) Admission decisions will be greatly affected. Universities usually boast on having a diversified pool of students from various states. With universities offering reduced rates to in-state students, and in some states also offering students state grants ,why would a student attend a much more expensive university outside of their state of residence, and end up paying more money and incurring more expenses? The dynamic will change, and universities need to figure out how to invest in external talent if they want to continue to get out-of-state students.

5) Higher interest rates. Graduate students who do elect to continue to pull loans after July 2012 will only be able to pull the unsubsidized loan. There will still be a good number of students who are unable to repay their student loans, and interest will still be accruing. This means an increase in student loan defaults. The way to ensure that at least some of the money is recovered is regrettably, by increasing rates to other borrowers, a practice that is not estranged to us who know the credit and lending world.

6) Educational grants will be reduced for subsequent students. I predict that graduate students who will be entirely affected by this, those of the 2014-2016 class, will be less likely to contribute to their university’s endowment – a pool of funds usually used to issue scholarship and institutional grants to students.

7) Reduction of the subsidized loan for undergrads may be out in the horizon. I believe that this change will undoubtedly filter out students who are only in school for the extra refund money generated as a result of their loan disbursements. The success of this change, may also impact undergraduate students in the years to come.

If you would like to chat more with Carl Letamendi, please feel free to drop him an email at: letamend@huizenga.nova.edu

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Give Me a Budget – Then I Will Give You a Loan


Barack Obama declared April to be financial literacy month and one community college in Virginia is taking this declaration very seriously. Tidewater CC is implementing a new approach to how it doles out federal loan dollars to its students.

As part of the federal loan program requirements, every student is required to complete an entrance loan counseling session prior to getting a loan. They also must complete an exit loan interview session upon graduation. There is no getting around it – those are the rules.

Tidewater officials have decided to expand upon the federally required entrance loan counseling session (which usually consists of some rudimentary questions about interest rates, managing debt, and loan repayment) and require students to also submit a budget of how they plan to repay their loans in addition to other expenses they anticipate accruing along the way.  Technically, they have to prepare two budgets – one that reflects repayment of the loans after graduation and another that depicts their plan for repayment if they have to suddenly drop out of college. Once the entrance counseling session is completed and Tidewater’s financial aid office has the required budget documents, they will gladly disburse any and all federal loan dollars in which a student may be eligible to receive.

I think is a great educational approach that Tidewater Community College is taking with its students and their federal loans. I can definitely see some pitfalls: administrative burden, just another hurdle for students trying to gain access to education, etc… However, many students go through the motions of securing federal (and private) education loans and never give it a second thought of what the ramifications will be for them once they have to enter into repayment. As total student loan debt surpasses credit card debt in our nation, financial literacy processes such as Tidewater’s are probably going to be more common among college campuses that are looking to provide a solid financial awareness foundation for their students (and future alumni).

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Private Education Loans Better Than Parent PLUS Option?


Overture Technologies is a leading provider of private student loan options for students and families. Through their Private Student Loan Marketplace, they give students the power of choice by allowing them to compare the terms and rates of multiple education lenders all in one convenient location. In a way, Overture has become the “one-stop-shop” for private education loans.

Last month, Overture announced that families/students received an average interest rate of 6.12% for loans selected through its Private Student Loan Marketplace in 2010. Given this interest rate, a number of families may be wondering if the private education loan trumps the benefits of the Parent PLUS loan considering it carries a fixed rate of 7.9%. My quick response would be “no”, but my qualified answer would be “it depends”.

Benefits For Getting A Parent Plus Loan vs. a  Private Education Loan

  • The interest rate is fixed (7.9%)
  • If the parent becomes totally disabled, the loan can be forgiven
  • You don’t need a co-signer (however an endorser may be an option if you have an adverse credit history)
  • The loan is only reported on the parent’s credit bureau and not the student
  • The approval process for the PLUS loan is easier (I have witnessed some families with a bankruptcy in their past being approved – which is odd because bankruptcy in the past 7 years automatically precludes a family from being eligible?)

The only benefit I can see to choosing a private education loan program over the Parent PLUS is the current interest rate. However, you have to keep in mind that in almost all cases, the private loan interest rate is variable and it could very easily jump into double digits and surpass the fixed rate provided by the Parent PLUS program.

That being said, if you have exhausted all of your federal loan options (Student and Parent PLUS Direct Loans), a private education loan may be your only choice to covering your education expenses. And, if you have to go the route of a private education loan, you should definitely make use of all the tools and resources provided through Overture’s Student Loan Marketplace.

There is certainly some value to be gained (& dollars to be saved) by comparing APR, interest rate, total cost, monthly payment, borrower benefits, fees and repayment options all in one place before pulling the trigger and choosing the best private education loan for your situation.

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Selective Service, The Draft, And Filing Your FAFSA


The Selective Service Act was initially put into place back in 1917. Basically, it gave the power/authority to the president to enlist males between the ages of 21 and 45 for military service. It became commonly known as “The Draft”.  Over the years, the SSA changed in how it was implemented and the age restrictions were narrowed but for now it is a rite of passage for every 18 year old male in the U.S. that is completing the FAFSA.

It may seem a little odd or out-of-place, but if you are a male between the ages of 18 and 25 and you plan on going to college and want benefit of any money provided to you by means of the FAFSA, you first have to register for selective service. Also, as a cautionary word of warning for older first-time students, if you reach the age of 26 and never file for selective service, you can permanently put at risk your eligibility to receive federal student loans and/or grants.

Registering for the selective service has been streamlined to help aid young individuals perform the required process in a quicker more efficient manner. All you have to do is visit this website, fill out the 11 boxes on the form and hit the submit button. It really is that easy!

Who Must Register With Selective Service?

  • Almost all male U.S. citizens, and male aliens living in the U.S., who are 18 through 25
  • Some non-citizens are required to register. Others are not. Noncitizens who are not required to register with Selective Service include men who are in the U.S. on student or visitor visas, and men who are part of a diplomatic or trade mission and their families.
  • Dual nationals of the U.S. and another country
  • Disabled men who live at home must register with Selective Service if they can reasonably leave their homes and move about independently.
  • Members of the Reserve and National Guard not on full-time active duty must register.
  • Men who would be classified as Conscientious Objectors

Who Is NOT Required To Register With Selective Service?

  • Young men in hospitals, mental institutions or prisons do not have to register while they are committed (however, if they are released prior to their 26th birthday, they have to register).
  • Young men serving in the military on full-time active duty do not have to register.
  • Students attending military service academies do not have to register.
  • Lawful non-immigrants on visas
  • Persons that are continually confined to a residence, hospital, or institution

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Year End Round-Up: Education Loans


As we continue our year end round-up series I thought that education loans would be a good topic to highlight. Education loans (federal and private) are an important tool that many families and students utilize to gain access to a college education when all other resources have been exhausted. The following is a list reflecting a few of my favorite education loan articles posted on CheapScholar.org this last year. Enjoy!

EDUCATION LOANS

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