Of the $1.56 trillion in current student loan debt outstanding, over 92% is in federal student loans…and for good reason! Private student loans can be as high as over 14% and do not nearly have as flexible payment options and protections that are found in federal loans. Of the 8% of student loans that are private loans, more than half of the borrowers did not fully exhaust their federal eligibility.
With all of the talk in politics and the markets, it is sometimes easy to lose sight of how these decisions have reverberating affects on the rest of our lives. With interest rates historically low, for the first time in the last three years federal student loan borrowing rates have dropped for those applying between July 1, 2019 and June 30, 2020.
- Direct Stafford Loans for Undergraduates (subsidized or unsubsidized) — 4.53% (5.05% for 2018-2019)
- Direct Stafford Loans for Graduate Students (unsubsidized only) — 6.08% (6.6% for 2018-2019)
- Direct PLUS Loans for Parents and Graduate Students — 7.08% (7.6% for 2018-2019)
To put the affect of this into context, let’s compare three students with identical loan balances after graduation of $100,000 over a standard payment schedule of 10 years. First, we have Jim, with an average rate of 4.5%, Jane with an average rate of 5%, and Jess with an average rate of 5.5%. Over the course of paying the loan off, Jim would pay $21,584 in interest, Jane $24,136, and Joe $30,231 in interest. Over the course of only 10 years, the 1% loan rate difference saves Jim 8.6% in total costs for his education! If we assume they take 15 years to pay down their loans, this savings amounts to a 15.7% savings towards their cost of attendance!
There are several routes available to help mitigate the costs of accumulated student loan balances even after the fact.
- Making interest only payments for loans that are unsubsidized while still in school. If this is not done, the interest is added to the balance of the loan in turn compounding and as a result will increase the overall cost of the loan.
- Consider the potential pros and cons of refinancing and consolidating loans into one loan for a single monthly payment and potentially lower rates.
While being proactive rather than reactive in planning often leads to the most impactful outcomes, wherever you and your loved ones are in the planning process it is important to discuss specific options as early as possible.
When discussing college funding with clients, our CFP® experts consider many factors, including college funding in the context of your overall planning, decision points (private vs. public schools, how many years, whether to include graduate school, how much of the cost you plan to fund), as well as alternative funding sources. We don’t just “run the numbers” for you. We discuss strategy, funding options and tradeoffs.