This has already been a challenging year for college applicants, starting with problems with a key federal form that delayed the delivery of financial aid. Now students and families have even more to worry about: Student loan costs for next school year are rising to their highest level in more than a decade.
The interest rate on new federal student loans for students will be 6.53 percent starting July 1, up from 5.5 percent this year, the Education Department announced last week.
Interest rates on graduate and professional loans rise to 8.08 percent. And interest rates on PLUS loans – additional financing available to parents of undergraduate and graduate students – will increase to 9.08 percent.
Federal student loan interest rates are based on a formula set by Congress that takes into account the high yield on the 10-year Treasury note from a May auction plus a fixed, additional interest rate that depends on the type of loan. The yield at the May 8 auction was 4.483 percent, plus 2.05 percent for student loans. (The Treasury auction yield was 3,448 last year. Markup rates are higher for graduate and PLUS loans.)
Interest rates have generally remained high as the Federal Reserve has fought inflation. Still, the new student loan interest rates appear to be particularly high compared to just a few years ago, said Mark Kantrowitz, a financial aid expert. In the 2020/21 academic year, the interest rate for student loans was 2.75 percent. Still, interest rates were as high as 14 percent in the early 1980s, Kantrowitz said.
The new interest rates apply to loans taken out from July 1 to June 2025 and will remain fixed for the entire term of the loan. They do not apply to loans that students have already taken out.
The increase means about an additional $5 monthly payment on $10,000 of debt over a 10-year repayment period, Mr. Kantrowitz calculated.
Interest rates are rising amid increasing concerns about student debt and the high cost of college. As of early 2024, nearly 43 million borrowers held an average of about $37,850 in federal student debt, according to Federal Student Aid, an office of the Education Department.
In a survey released Thursday by the nonpartisan Pew Research Center, nearly half of American adults (47 percent) said a college degree is worth it, but only if someone doesn’t have to take out loans to attend. Less than a quarter (22 percent) said the cost would be worth it, even if someone had to take out a loan.
Pew also analyzed federal data and found that households headed by a recent high school graduate had a typical net worth of $30,700 in 2022, compared to $120,200 for households headed by a recent college graduate.
Michele Shepard Zampini, senior director of college affordability at the nonprofit Institute for College Access and Success, said students should keep an eye on new federal loan rates — and borrowing for college.
“The prices are higher than we would like, but that’s not a deal breaker,” she said. “I never want someone to not go to college just because it means they have to take out federal student loans,” she added.
The institute advises borrowers to “borrow what they need” to cover costs and fully participate in college, Ms. Zampini said. In general, as a student relying on your family to support you, you can take out up to $31,000 in federal loans. (The amount you can borrow is limited each year and the limits are higher for independent students.)
Some students may try to borrow less because they believe they can work more to cover the costs. But that often works “to the detriment of students,” Ms. Zampini said, because students may have to work so hard that they fall behind in class. “It’s definitely a balance.”
Students should compare the costs of different colleges and consider choosing lower-cost alternatives — perhaps a public school rather than a private school — to get their costs under control, Ms. Zampini said. Check a school’s graduation rates and career prospects. If students typically take longer than four years to graduate, the degree will cost more money. (One place to look this up is the Department of Education’s online College Scorecard.)
The new, more generous federal student loan repayment plan, known as SAVE, provides a “safety valve” if you’re worried about meeting your loan payments, Ms. Zampini said. With SAVE, which stands for Saving on a Valuable Education, payments are based on income and household size. After you make monthly payments for a certain number of years – as few as ten, depending on the amount you borrow – the remaining balance will be forgiven.
For some low-income earners, payments under SAVE can be reduced to zero. And if a borrower’s monthly payment doesn’t cover the interest owed, the Department of Education forfeits the uncovered portion of the interest. The loan balance does not grow due to unpaid interest.
Saving in a 529 plan can help reduce the amount you borrow. A 529 plan is a tax-advantaged savings account designed to help cover college costs. Contributions to the accounts, named after part of the tax code, grow tax-free and can be withdrawn tax-free to pay for expenses such as tuition, room, board and books. (There is no federal tax deduction for 529 contributions, but many states offer tax breaks.)
“529s are a good tool in the toolbox,” said Tony Kure, managing director for the Northeast Ohio market at wealth management firm Johnson Investment Counsel.
Mr. Kure recommends opening a 529 when a child is born to allow as much time as possible to build up funds before college. If you have more than one child, he recommends opening a separate account for each child.
Many 529 plans offer promotions or incentives to save in May, so now is a good time to look for accounts if you’ve been thinking about opening one.
Here are some questions and answers about student loans:
How much should I borrow for college?
Aim for total student debt to be less than your expected annual starting salary, Mr. Kantrowitz said. If your debt is less than your income, he said, you should be able to pay off your student loans in 10 years or less. To get an idea of what you could earn, check out the Department of Labor’s data on salaries by occupation. Another place to start is a report published last year by HEA Group, a research and consulting firm, on salaries based on college degrees.
Can I get more favorable terms for private student loans?
Interest rates on some private student loans — offered by banks, not the federal government — could be competitive with the new federal rates for borrowers with excellent credit (scores of 780 or higher), Mr. Kantrowitz said. However, private loans can be riskier because they lack the protections that federal loans provide, such as: Such as the ability to take a payment break in the event of a financial setback, payment plans tied to your income, and the ability to have some debt forgiven.
Can I deduct student loan interest on my federal tax return?
You can generally deduct up to $2,500 in interest on federal and private student loans, even if you don’t itemize on your tax return, Mr. Kantrowitz said.
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2024-05-24 13:00:21
www.nytimes.com
