Interest Rates to Rise for Student Loans

It is about to get more expensive for many graduates to pay off college loans. Effective July 1, interest rates on two main financial aid programs, Stafford and Plus loans, will be rising. Those still in school, or who haven't yet begun paying back their loans, still have a time to lock in a lower interest rate.

RENEE MONTAGNE, host:

On Fridays, we focus on your money. Today, pay more to borrow for college.

(Soundbite of music)

MONTAGNE: It's about to get more expensive for students and their parents to pay off their college loans. Effective July 1st, the interest rates on the two main types of student loans will be rising. Students still in school, or those who haven't yet begun paying back their loans, still have time to lock in a lower interest rate, as NPR's Jack Speer reports.

JACK SPEER reporting:

After a period of years that featured some of the lowest student loan rates on record, interest rates have been steadily moving higher, and next month, they'll be going up again. Interest rates for Stafford loans - the kind taken out by students - will rise nearly two percent. Rates on PLUS loans, taken out by parents, will increase by a similar amount. And with the level of debt many of today's college students are carrying, a two-percentage point hike is a big deal.

Ms. CARMEN BERKELEY(ph) (Student, University of Pittsburgh): It's pretty daunting. You know, I owe probably about $60,000 by the time I graduate from the University of Pittsburgh.

Carmen Berkeley is majoring in political science and communications. Like many students, she received word of the changes in her student loan rates while getting ready for final exams and lining up her summer internship.

Ms. BERKELEY: Basically, the letter that they send you: Interest rates will be going up, so make sure you consolidate now. But, they don't really explain it. You know, and for students, our minds are in other places. You know, we're thinking about trying to graduate from college. So, when you're throwing these numbers in students' faces, especially the ones that don't know anything about economics, well then, of course, they're going to just throw that in the back of their drawer.

SPEER: For students with a variable rate loan who are still in school, interest rates will rise from four and three-quarters percent, to just over six and a half percent. Patricia Scherschel is a vice president at Sallie Mae, the largest provider of federally insured student loans. She says the increase will produce a significant bite for the average student.

Ms. PATRICIA SCHERSCHEL (Vice President of Loan Consolidation, Sallie Mae): For a $20,000 loan, for the student borrower, a 4.75 percent rate means a total repayment of a little over $31,000. If you end up, you know, applying July 1st, instead of June 30th, then we're looking at $36,000 and change in total payments. So, you've just cost yourself $5,000 by being as much as one minute late.

SPEER: By consolidating their outstanding loans, students or their parents will be able to lock in the old interest rate for the life of the loan. Scherschel says even students with just one school loan should refinance in order to avoid the new higher interest rates that will take effect on July 1st.

Ms. SCHERSCHEL: Any borrower who has variable rate loans and who has at least $5,000 in eligible loans to consolidate would be able to consolidate now and would have reason to consolidate to lock the rate.

SPEER: Students and parents who refinance their loans may also be able to stretch out the payment period - something that could be especially helpful for recent graduates just entering the job market. Not surprisingly, many students and parents aren't happy about the new higher loan rates.

Jennifer Pae is vice president of the United States Student Association, a group that lobbies on behalf of college students on Capitol Hill. She says over the past few decades, the system that helps kids pay for college has gone through some big changes.

Ms. JENNIFER PAE (Vice President, United States Student Association): Back in the 1970s, grant aid was actually 70 percent of a student's financial aid package, and 30 percent was student loans. We've seen that switch. Now, we're facing - students are facing, you know, 70 percent of the financial aide package in loans, and 30 percent in grant aid.

SPEER: And because of the greater reliance on loans instead of grants, even a small increase in interest rates makes a big difference. Students and parents looking to refinance school loans need to be sure they apply with an eligible lender, since making a mistake with less than a month to go before the new rates take effect, could be costly. For students who are entering school this fall or taking out new loans, consolidation isn't an issue. That's because Congress recently approved legislation that will fix student loan rates after July of this year. Under those new rules, Stafford loans will be capped at 6.8 percent. The limit on PLUS loans will be set at 8.5 percent.

Jack Speer, NPR News, Washington.

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